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Brasilia - Brazil moved aggressively to shield its economy from a widening global financial crisis on Thursday, unveiling a slate of measures to boost consumption and investment in Latin America’s biggest country.
The announcement comes just one day after Brazil’s central bank cut interest rates for third straight time to shore up credit, citing mounting concerns about the impact of the eurozone debt crisis on the Brazilian economy.
Financial markets rallied on the news, with Brazil’s Bovespa stock index surging as much 2% and the currency gaining more than 1%. Shares in exchange operator BM&FBovespa jumped more than 7% and retail stocks also gained.
The government of President Dilma Rousseff is seeking to prevent the global crisis from derailing Brazil’s economic boom, which has lifted more than 25 million people out of poverty over the last decade and made the country an emerging economic powerhouse.
“We won’t allow the global crisis to contaminate the Brazilian economy,” Finance Minister Guido Mantega said at a news conference in Brasilia, adding that the measures aim to ensure that Brazil’s economy starts 2012 on the upswing and grows 5% next year.
The measures encompass a broad spectrum of the economy, from stock and bond purchases to tax breaks for domestic manufacturers. They include:
Economy slowing
Brazil introduced similar measures in the wake of the 2008 crisis, cutting taxes on household appliances and other white goods to boost buying within the country’s domestic market. Those measures helped the country exit recession swiftly in 2009 and notch a muscular 7.5% expansion in 2010, the fastest growth rate in 24 years.
But the economy has now slowed sharply from that rate, and economists are worried that activity will suffer as world markets remain in turmoil, reducing investment and lending.
Asked if the elimination of the tax on foreign purchases of stocks and bonds could prompt of wave of speculative capital into Brazil, Mantega said the government would resurrect the levy if a spurt in inflows drives up the value of Brazil’s currency, which hit a 12-year high earlier this year.
Brazil is not alone in worrying about the eurozone sovereign debt crisis, which threatens the future of the 17-nation monetary union.
On Wednesday, the US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said they will offer cheaper dollar liquidity to starved European banks facing a sovereign debt crisis that threatens financial disaster.
The eurozone sovereign debt crisis has roiled for two years but has recently widened to include larger economies, such as Italy - an economy far larger than Portugal, Ireland or Greece. While Portugal, Ireland and Greece have received bailouts to stave off default, rescuing Italy would likely be too costly for Europe to afford.
The turmoil abroad has weighed on global growth. Forecasts for Brazil’s economic expansion this year have slid from above 4% at the start of the year to barely 3%, with some analysts saying the number could go even lower.
Third-quarter gross domestic product figures are due on December 6, and some analysts say the economy may have contracted slightly during the period.
The announcement comes just one day after Brazil’s central bank cut interest rates for third straight time to shore up credit, citing mounting concerns about the impact of the eurozone debt crisis on the Brazilian economy.
Financial markets rallied on the news, with Brazil’s Bovespa stock index surging as much 2% and the currency gaining more than 1%. Shares in exchange operator BM&FBovespa jumped more than 7% and retail stocks also gained.
The government of President Dilma Rousseff is seeking to prevent the global crisis from derailing Brazil’s economic boom, which has lifted more than 25 million people out of poverty over the last decade and made the country an emerging economic powerhouse.
“We won’t allow the global crisis to contaminate the Brazilian economy,” Finance Minister Guido Mantega said at a news conference in Brasilia, adding that the measures aim to ensure that Brazil’s economy starts 2012 on the upswing and grows 5% next year.
The measures encompass a broad spectrum of the economy, from stock and bond purchases to tax breaks for domestic manufacturers. They include:
- Eliminating the IOF transactions tax on foreign purchases of Brazilian stocks;
- Eliminating the IOF tax on foreign purchases of corporate bonds with maturities of more than four years;
- A reduction in the IOF tax on personal credit to 2.5% from 3% per year;
- A reduction of the IPI industrial tax on home applicances such as stoves, refrigerators, freezers and washing machines;
- A 3% tax rebate for exporters of industrialised goods; and
- Eliminating a tax on pastas, flour and bread.
Economy slowing
Brazil introduced similar measures in the wake of the 2008 crisis, cutting taxes on household appliances and other white goods to boost buying within the country’s domestic market. Those measures helped the country exit recession swiftly in 2009 and notch a muscular 7.5% expansion in 2010, the fastest growth rate in 24 years.
But the economy has now slowed sharply from that rate, and economists are worried that activity will suffer as world markets remain in turmoil, reducing investment and lending.
Asked if the elimination of the tax on foreign purchases of stocks and bonds could prompt of wave of speculative capital into Brazil, Mantega said the government would resurrect the levy if a spurt in inflows drives up the value of Brazil’s currency, which hit a 12-year high earlier this year.
Brazil is not alone in worrying about the eurozone sovereign debt crisis, which threatens the future of the 17-nation monetary union.
On Wednesday, the US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said they will offer cheaper dollar liquidity to starved European banks facing a sovereign debt crisis that threatens financial disaster.
The eurozone sovereign debt crisis has roiled for two years but has recently widened to include larger economies, such as Italy - an economy far larger than Portugal, Ireland or Greece. While Portugal, Ireland and Greece have received bailouts to stave off default, rescuing Italy would likely be too costly for Europe to afford.
The turmoil abroad has weighed on global growth. Forecasts for Brazil’s economic expansion this year have slid from above 4% at the start of the year to barely 3%, with some analysts saying the number could go even lower.
Third-quarter gross domestic product figures are due on December 6, and some analysts say the economy may have contracted slightly during the period.
