Brazil vows to protect manufacturing with currency devaluation

March 18, 2012 at 19:31

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Brazil’s finance minister has vowed to hold down the value of the real and enact new measures to protect domestic industries, in an attempt to revive the country’s slumping economic growth.

“We don’t want to lose our manufacturing sector,” Guido Mantega told the Financial Times in an interview. “Brazil is not merely an exporter of commodities. We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage.”

The centre-left government of Dilma Rousseff, the president, has staked its popularity on its ability to deliver high growth, taking pride in its membership of the Bric club of fast-growing emerging nations that includes Russia, India, and China.

But like China and India, the country`s economy is slowing. In Brazil’s case an influx of cheap imports, especially from China, has punished its manufacturing sector. Industrial production fell 2.1 per cent in January compared with December, led by a 30 per cent decline in automotive production.

Mr Mantega said the government will extend an exemption currently enjoyed by only a few sectors, under which a social security levy equivalent to 20 per cent of their total payroll has been replaced by a smaller tax on revenues. New beneficiaries would include the textile and clothing industry, one of Brazil’s largest employers with about 2 million workers.

The government fears that employers will try to maintain their competitiveness by cutting worker salaries, hampering domestic consumption.

Growth slowed sharply last year to 2.7 per cent from 7.5 per cent in 2010, prompting the government to slash interest rates and take measures to protect industry.

The Brazilian government imposed higher taxes on imported cars, renegotiated a trade deal with Mexico, and raised taxes on foreign loans in an attempt to reduce capital inflows into the country. The last measure helped weaken the real, which is down from a 12-year-high reached in July.

“While conditions favour future growth, a slow recovery has compounded official concerns regarding the rising currency,” said Itau bank economist Ilan Goldfajn in a research note.

Mr Mantega denied suggestions that Latin America’s largest market had embraced protectionism, saying his country had a right to defend itself from a global glut in manufactured goods: “Brazil is not taking protectionist measures. Brazil is taking defensive measures. We are in favour of free competition … but we cannot keep our borders completely free while others are using non-competitive mechanisms.”

India, which is also confronting a slowdown, disappointed investors and economists on Friday by presenting a federal budget that failed to bring public spending under control and gave little reassurance that the nation was on a more credible fiscal path.

India’s growth rate has fallen to 6.1 per cent from 9 per cent over the past two and a half years. “The aim is to again get [economic growth] back to 8-9 per cent,” India’s prime minister, Manmohan Singh, said.

Pranab Mukherjee, India’s finance minister, forecast a fiscal deficit of 5.9 per cent of GDP gross domestic product in the year to the end of March against a previous target of 4.6 per cent.