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Market News

Crisis puts Brazil's middle-class dreams on hold

RIO DE JANEIRO, Nov 13 (Reuters) - With big drops in auto sales, worker layoffs and scarce credit, signs are growing that the financial crisis is hurting Brazil’s middle class, whose ascent in recent years symbolized the economy’s boom.

From forests of new condominium towers on the beach-side outskirts of Rio de Janeiro to monstrous traffic jams in the financial capital of Sao Paulo, credit-fueled buying power has transformed Latin America’s biggest economy.

Millions have risen from poverty under the six-year-old administration of President Luiz Inacio Lula da Silva, helped by social programs and a global commodities boom that helped turn Brazil into an export powerhouse.

But as the financial fallout spreads, credit-dependent industries like cars and real estate are starting to feel the pain. The government is also drawing criticism for initially downplaying the crisis and for not pushing through tough economic reforms during the good times.

“The government says this is just a small wave, but it is already affecting everything -- our markets, our wallets, our jobs,” said Andre da Silva, an accountant who had just left a branch of the popular Casas Bahia home appliance store in Rio.

The 48-year-old father left empty-handed after being told he would have to pay in three installments for an air conditioner rather than the 10 on offer before the crisis.

“It doesn’t fit my budget any more,” he complained.

Credit deals at Casas Bahia and other stores in recent years allowed many Brazilians with salaries as low as $300 or $400 a month to buy their first refrigerators or TVs.

But with credit drying up, the offers are no longer so sweet and consumers worried about their jobs are thinking twice about annual interest rates in some cases over 100 percent.

Brazil’s stock market has plunged more than 50 percent since hitting an all-time high in May, shaking the confidence of a new generation of individual investors who signed up to online stock accounts in droves in recent years.

“I think the middle class is going to suffer more than the lower class,” said Sergio Vale, an economist at MB Associados in Sao Paulo, who sees credit growth falling to 8 percent next year from above 20 percent in each of the past two years.

“The lower class is protected as the tight credit is unlikely to affect the ability to buy clothes and food.”

HIGH RATE BURDEN

Three years of torrid growth in the auto industry, also fueled by easy loans, is screeching to a halt as higher interest rates and the credit drought take their toll.

Sales of new cars and trucks in October slumped 11 percent from September and several big automakers have cut shifts and ordered factory workers to take periods of paid leave.

The Sao Paulo state government said this week it would extend a 4 billion reais ($1.7 billion) credit line to the auto industry, following the federal government’s move to make the same amount available for credit through a state-run bank.

The help came too late for Claudia Ferreira Ambrosia, who said she was one of several hundred people laid off by a group of dealerships for Peugeot and Ford cars in Rio this month.

“Things were pretty bad, sales were down around 70 percent,” she said.

For most Brazilians, the slowdown still pales in comparison to economic crises in the past 20 years that saw the currency devalued and inflation soar to four figures. Most economists see Brazil growing 2-3 percent next year, an enviable forecast for Americans and Europeans falling into recession.

But the evaporation of credit and interest rates among the highest in the world have some analysts worried that financial conditions could make the economic downturn more severe.

“It’s really scary the way the central bank is acting,” said Roberto Luis Troster, an economist and partner at the Integral Trust consultancy in Sao Paulo, referring to the bank’s policy of high interest rates to fight inflation.

It halted a series of rate hikes last month, but still kept its benchmark rate at a two-year high of 13.75 percent.

Critics also say Brazil will now pay the price of Lula’s failure to pass major reforms to cut the red tape that stifles the competitiveness of the world’s 10th largest economy.

But for Fabio Gomes, a sales manager at a Rio dealership for carmaker Fiat, the crisis is just a bump in the road compared to past upheavals. He recalled emptying his bank account and buying tires to hedge against inflation under the chaotic presidency of Fernando Collor in the early 1990s.

“If you accommodate a crisis, it will go away,” he said, pointing to a graph showing steady rises in sales at his office specializing in selling discounted cars to businesses. (Editing by Todd Benson and Kieran Murray)

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