Brazil's message: Buy now

GlobalPost
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The World

SAO PAULO — When the international crisis struck credit markets here last fall, car sales in Brazil tanked: a worrisome development in a country where the automotive industry is a vital source of industrial employment. Fourth-quarter new car registrations were just under 464,000, which was 112,000 less than the fourth quarter of the previous year.

Yet in the first quarter of 2009, everything turned around, with sales spiking to 527,000, beating out even the first quarter of 2008, when Brazil’s economy was booming.

Magic trick? Try tax holiday. On Dec. 11, the Brazilian government slashed the IPI, a tax on industrialized products: For cars with 1.0 liter engines, the 7 percent tax disappeared completely, with the savings largely passed along to the consumers. Larger vehicles taxed at higher rates got partial cuts. (Non-driving smokers were out of luck, however: The IPI on cigarettes was raised to make up for part of the revenue loss.)

At places like Brazilwagen, a Volkswagen dealership in Sao Paulo’s upper-middle class Moema neighborhood, that has made for a pretty good year.

“Crisis? I don’t know anything about a crisis,” said Ricardo Cosme, as he showed Milton Souza and his parents how to operate the headlights and lock the trunk of their brand-new car, a charcoal gray Gol, on Friday evening.

Milton Souza's father, Enilton P. Souza, a retired metalworker, said it was the family’s first new car.

The tax incentive was a big part of the decision to buy now, Milton said. “I wanted a new car,” he said, “and with the IPI the price went down. It made a big difference.” He estimated he saved as much as 3,000 reais, about $1,500. (He probably didn’t, since the cost of the car was about 25,000 reais, but in economics, perceptions are often more important than reality.)

In the Fiat dealership across the street, the story was the same, according to salesman Gabriel Djehdian. He said the fourth quarter of 2008 was the worst in 10 years. A handful of his colleagues were laid off. The banks were far more reluctant to give credit. “If you had a letter of your name spelled wrong, they would reject you,” he said. The day the government announced the tax break, his colleagues scrambled to call all their customers who were in the midst of negotiations, offered them an instantly better price, and closed numerous deals. Sales have been booming since.

In part because of the effectiveness of the tax break, in April the government announced similar tax reductions for refrigerators, stoves and washing machines. Sales on those products have jumped 20 percent, according to Lourival Kicula, the president of Eletros, a trade organization that represents electronics and appliance manufacturers. He was citing virtually completed May numbers.

Government meddling in tax markets is never entirely clean: With the cost of new cars down, the cost of used cars fell, too, causing various problems. The stock that dealers had bought suddenly sunk in value. At Brazilwagen, some sold at a loss, said sales supervisor Eduardo Wilbert. Customers suddenly found some of their tax savings evaporated due to the reduced trade-in value of their old car. And perhaps most significantly, used car dealers across the country laid off workers, with some closing entirely.

But as a tool to maintain employment in important sectors of the Brazilian economy, the tax holiday on cars and appliances has been “an important component” of the government’s crisis-fighting tactics, said Samuel Pessoa, an economics professor at the Getulio Vargas Foundation, one of Brazil’s top business schools. “The crisis entered Brazil through the credit market,” he said, “and had a very big impact on those products. For durable goods, the tax exemption is efficient: It helps with a very difficult problem.”

One inevitable downside of the tax break, of course, was a reduction in government revenue. That was especially alarming to state and municipal governments, who receive funds from the IPI directly from the federal government. After protests from local officials, the federal government guaranteed to continue previous funding levels by tapping into Brazil's budget surplus.

Despite the statistical evidence of increasing sales and the signs up trumpeting lower prices, many customers remained skeptical that the tax break to the industries was being passed along to consumers. In a Casas Bahia department store across from the Municipal Theater in Sao Paulo’s gritty center, Rai Almeida doubted that the IPI exemption provided any savings at all on the 699-real Brastemp stove he was buying. “It hasn’t done anything,” said Almeida, a 40-year-old salesman. “They reduced the taxes, but in practice, the store put it back in the price some other way.”

That was the feeling of a number of other working-class customers at Casas Bahia and nearby Extra, even as store managers stressed that prices went down the day after the government made the announcement. To some extent, that seems to be borne out: A study by the Getulio Vargas Foundation found that appliances that the tax holiday applied to did see a decline in retail prices from May 2008 to May 2009.

The tax breaks are scheduled to end June 30, and with Brazil believed to be in recession, sales could once again tank and jobs could be at risk. Pessoa, the economics professor, said he thinks the breaks will be renewed until the market has turned around. Djehdian, the Fiat salesman, thinks the government will re-implement the taxes, but gradually.

The government, of course, insists that it will be all over. The implicit message in that, of course, is: buy now!

More on the Brazilian economy:

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Brazil's (unofficial) economic forecast

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Where "Survivor" contestants battled

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