Brazil's Finance Minister Guido Mantega sought to play down concerns that the tax cut measures could pressure prices further, a perennial worry in a country with a long history of runaway inflation.Ueslei Marcelino/Reuters
Brazil moved aggressively to shield its economy from the euro zone debt crisis on Thursday, taking a flurry of measures to boost consumption and investment in Latin America's biggest country.
The measures, which include tax cuts for foreign investors and domestic manufacturers, were unveiled one day after Brazil's central bank slashed interest rates for the third straight time to shore up credit, citing concerns about the financial turmoil emanating from Europe.
Brazilian markets rallied, with the Bovespa stock index surging as much as 2.5 per cent and the currency more than 1 per cent. Shares in exchange operator BM&FBovespa jumped nearly 9 per cent and retail stocks gained.
With the economy already feeling the effects of a global credit crunch, Finance Minister Guido Mantega reiterated Brazil's willingness to do its part in European rescue efforts by offering an unspecified amount of additional funds for the International Monetary Fund.
The government of Brazilian President Dilma Rousseff is seeking to prevent the turmoil from derailing Brazil's boom, which has lifted more than 25 million people out of poverty in the past decade and made the country one of the world's hottest investment destinations.
"We won't allow the global crisis to contaminate the Brazilian economy," Mr. Mantega said, adding that the measures aim to ensure that Brazil's economy starts 2012 on the upswing and grows 5 per cent next year.
The measures underscore the pragmatic style of the Rousseff administration, which has proven willing to abruptly change policy direction as economic conditions shift. Early this year, Brazil clamped down on credit and foreign capital inflows to prevent the economy from overheating. Now it is unwinding those restrictions in the face of chilling headwinds from abroad.
TAX CUTS AT A GLANCE
The new measures, which take effect immediately, encompass a broad spectrum. They include:
–Eliminating the IOF transactions tax on foreign purchases of Brazilian stocks and corporate bonds with maturities of more than four years;
–A reduction in the IOF tax on personal loans to 2.5 per cent from 3 per cent per year
–A reduction of the IPI industrial tax on home appliances;
–A 3-per-cent tax rebate for exporters of industrialized goods;
–Eliminating a tax on pastas, flour and bread.
Analysts said the steps might not be enough to stave off a deeper slowdown if major economies crumble further.
"If things go from bad to worse in the developed world, then small tax measures aren't necessarily going to offset market impact," said David Rees, emerging markets economist at Capital Economics in London. "If you see things deepen next year, you could see more measures."
Mr. Mantega said the measures will probably cost the government more than 1 billion reais ($560-million) in lost tax revenue next year. But he stressed that as the economy gains steam, tax collection in other areas would likely pick up the slack.
ECONOMY SLOWING
The effects of the measures are likely to be felt immediately. Federal bank Caixa Economica Federal announced 5 billion reais in new credit lines for home appliance and furniture purchases, and BM&FBovespa said the elimination of the tax on stock purchases could pave the way for a surge in share offerings in 2012.
Brazil introduced similar measures in the wake of the 2008 crisis. The strategy proved effective, helping the country exit recession swiftly in 2009 and notch a muscular 7.5-per-cent expansion in 2010, the fastest growth rate in 24 years.
But the stimulus measures also helped stoke inflation, which closed 2010 at a six-year high and has sped above a target ceiling of 6.5 per cent this year.
Mr. Mantega sought to play down concerns that the measures could pressure prices further, a perennial worry in a country with a long history of runaway inflation.
"The government will never let inflation come back," he said. "At the end of this year, we'll have smaller rates, and next year, it's already guaranteed we'll have less inflation."
He also warned that the government could resurrect tax measures if speculative inflows pour into the country and boost the currency, which hit a 12-year high earlier this year.
Brazil is not alone in worrying about the euro zone crisis, which threatens the future of the 17-nation monetary union.
On Wednesday, the U.S. Federal Reserve Board, 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.
Forecasts for Brazil's economic expansion in 2011 have slid from above 4 per cent at the start of the year to barely 3 per cent, with some saying the number could go even lower.
Third-quarter gross domestic product figures are due on Tuesday, and some analysts say the economy may have contracted slightly during the period.