Brazil readies more stimulus to boost economy

BRASILIA Wed Dec 19, 2012 11:02pm IST

Brazil's President Dilma Rousseff gestures during the opening ceremony of the 7th National Meeting of the Industry in Brasilia December 5, 2012. REUTERS/Ueslei Marcelino

Brazil's President Dilma Rousseff gestures during the opening ceremony of the 7th National Meeting of the Industry in Brasilia December 5, 2012.

Credit: Reuters/Ueslei Marcelino

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BRASILIA (Reuters) - Brazil's government on Wednesday geared up to prolong stimulus measures as President Dilma Rousseff seeks to revive an economy that remains stagnant despite more than a year of tax breaks, interest rate cuts, and other efforts to jumpstart growth.

Finance Minister Guido Mantega said the new measures, to be detailed later in the day, would extend payroll tax breaks to sectors beyond targeted industries that already benefit from existing ones. The government, he added, will also unveil changes to next year's IPI industrial tax on automobiles and home appliances.

Mantega said the government in 2013 will "certainly" raise gasoline prices, which will help stem losses at state owned-oil company Petroleo Brasileiro SA (PETR4.SA), or Petrobras, which needs extra revenue to fund a massive investment program.

An increase in gasoline prices, however, will also add to concerns that inflation, already above the center of the official government target range, will keep creeping upward.

The continued stimulus measures come as Rousseff, disappointed with economic growth for the year that may not even reach 1 percent, struggles to revive Latin America's biggest economy.

Brazil's economy remains in a rut despite the stimulus thus far, as well as record-low interest rates and subsidized credit for industry. Business and industry have cut back on investments and consumers are growing more cautious.

In an address on Wednesday, Rousseff said the government would keep finding ways to make Brazil's economy more efficient. She said one of her "major struggles" in 2013 would be lowering taxes that have long been considered too steep in Brazil.

Meanwhile, Mantega, who has had to revise rosy forecasts all year as the economy limped along, again suggested Brazil is on the mend. In comments over breakfast with reporters in Brasilia, he predicted 2013 growth of 4 percent, still more optimistic than most economists, whose forecasts are closer to 3 percent.

"I see the economy in clear recovery," Mantega said.

The government is trying to revive investment by business and industries that have grown less competitive because of appreciation in Brazil's currency, the real, and cheap imports. At the same time, Brazilian industry has lost productivity due to a shortfall in skilled labor and rapid increases in wages.

Greater investment is crucial in the coming years to help revive a Brazilian economy that over the past decade was sustained by consumer spending. The retail boom is now seen as exhausted by many economists, given high default levels on loans and the looming effects of a prolonged slowdown.

INFLATION BITES EVEN AS ECONOMY STRUGGLES

All the same, the government and monetary officials are keeping a close eye on price increases.

Even with sluggish growth, inflation remains persistent in Brazil because of a spike earlier in the year in global food and energy prices and the country's long history of indexation, built-in salary and price increases that were introduced during past decades of volatility.

Consumer prices rose in the month to mid-December at their fastest rate since May 2011, data showed earlier on Wednesday.

The pending gasoline increase will only add to the pressure.

Brazil's government in recent years has kept gasoline prices below global levels. But the strategy has crimped revenues at Petrobras, which earlier this year posted its first quarterly loss in thirteen years.

The company's losses are hampering Brazil's efforts to more than double oil output by 2020 and join Russia, Saudi Arabia and the United States among the world's top four oil producers.

Mantega said he expects global oil prices to fall in 2013, which should help curtail price increases elsewhere in the economy.

Petrobras' preferred shares rose 2.43 percent on Wednesday, trading at 20.64 reais, while common shares (PETR3.SA) added 2.35 percent.

(Additional reporting by Asher Levine in Sao Paulo; Writing by Paulo Prada; Editing by W Simon, Chizu Nomiyama and David Gregorio)

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