August 2, 2011 / 4:15 PM / in 6 years

UPDATE 1-Brazil throws $25 bln lifeline to sagging industry

 * Brazil unveils plan to aid struggling industries
 * Includes $16 bln in targeted tax breaks
 * Plan balances worries over inflation, gov't finances
 (Adds details, quotes, analysis throughout, byline)
 By Raymond Colitt and Brian Winter
 BRASILIA/SAO PAULO, Aug 2 (Reuters) - Brazil's government
on Tuesday granted more than $25 billion in new financing and
tax breaks to local factories struggling with an overvalued
currency, imports from China and signs of a broader economic
slowdown at home and abroad.
 The long-awaited plan, known as "Bigger Brazil," seeks to
address a potentially dangerous imbalance: Although credit and
commodity exports continue to drive robust overall economic
growth in Brazil, many factories are seeing their output and
profit shrink, prompting worries of a longer-term malaise.
 Despite concerns that the new measures could fuel inflation
or erode the government's finances, Finance Minister Guido
Mantega said factories clearly needed urgent help -- especially
as the global economy slows again and faces new threats from
the U.S. and European debt crises.
 The measures included 25 billion reais ($16 billion) in tax
breaks for targeted industries such as shoemakers and software
companies; 7 billion reais in new financing via the BNDES state
development bank; and the creation of a new export financing
facility, among other steps. For details, see [ID:nN1E7710DG]
 Mantega said Brazilian manufacturers are also struggling to
compete internationally because larger economies, including the
United States, are "artificially" weakening their currencies in
order to make their own exports cheaper.
 Brazil's real BRBY has gained 6 percent against the
dollar this year and is the world's most overvalued currency by
some measures. Nearly half of the country's exporters have lost
market share in the past year, according to a poll released
this week by the CNI industry group.
 "We're seeing predatory competition at a global level,"
Mantega told officials and industry leaders who gathered for
the formal announcement. "This crisis scenario especially
damages the manufacturing sector."
 Overall, the plan was a hard-fought compromise between
industrial leaders who clamored for larger tax breaks, and
fiscal hawks within President Dilma Rousseff's government who
are worried about inflation and hitting a budget deficit target
for this year that is closely watched by investors.
 The reception from local industries was lukewarm.
 "It's a good start," said Paulo Skaf, the president of the
Fiesp industry association.
 "It's logical that we would have liked to see all
(industrial) sectors have payroll tax breaks. But it's a start
in these sectors with intensive labor. We hope that it
(eventually) extends to other sectors," Skaf said.
 The announcement coincided with data showing that
industrial production fell more than expected in June, down 1.6
percent from the previous month. Manufacturing output in Brazil
has been mostly flat for more than a year despite a robust
economic expansion. [ID:nN1E77106Y]
 "This could provide some relief, but it won't change the
overall trend," said Zeina Latif, senior Latin America
economist with RBS in Sao Paulo. "Investment decisions are more
 While global trends, including the weak U.S. dollar, have
played a major role in the struggles of Brazilian industry,
local factors have also weighed.
 Terrible infrastructure, one of the developing world's
highest tax takes and expensive labor costs contribute to what
is known locally as the "Brazil cost" -- the unusually high
prices of domestic goods. For example, even a basic two-door
new car can cost upward of $30,000, nearly twice the level in
the United States.
 Rousseff's government has shown little interest in
structural reforms, such as a revision of the tax code, that
could make industries substantially more competitive.
 The plan establishes new advantages for local manufacturers
on government procurement contracts, which is big business in
Brazil, especially as the country expands its infrastructure
ahead of the 2014 World Cup and 2016 Olympics.
 To help provide financing for manufacturers, the government
said it would also extend an existing 75 billion reais ($48
billion) credit line to the BNDES state development bank until
the end of next year -- a move that could prove controversial.
 Some economists say Brazil's reliance on the BNDES creates
inflationary pressures and distorts credit markets by crowding
out private-sector lenders.
 Trade and Industry Minister Fernando Pimentel also said the
government would focus on better control of Brazil's borders in
order to catch counterfeit goods coming from China -- although
customs officials have said they need more financial resources
in order to accomplish that goal.
 (Additional reporting by Luciana Lopez and Leonardo Goy;
Editing by Todd Benson and Dan Grebler)
 ($1 = 1.56 reais)

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