VZCZCXRO2792
RR RUEHRG
DE RUEHBR #0141/01 0351342
ZNR UUUUU ZZH
R 041342Z FEB 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3474
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7226
RUEHSO/AMCONSUL SAO PAULO 3489
RUEHRG/AMCONSUL RECIFE 9041

UNCLAS SECTION 01 OF 02 BRASILIA 000141 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EEB/TPP/MTAA, WHA/BSC, WHA/EPSC 
STATE PASS USTR FOR RMALMROSE 
STATE PASS USDOC FOR ADRISCOLL, LFUSSELL 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV BR
SUBJECT:  BRAZIL: AUTOMOBILE SECTOR MEASURES 
 
REF: A) STATE 4753 B)SAO PAULO 0680 C) SAO PAULO 0207 D) BRASILIA 
128 E) SAO PAULO 070 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) Summary: The government of Brazil, in addressing the global 
economic downturn's negative impact on its automotive sector, has 
implemented several measures aimed at freeing up credit lines, 
stimulating domestic demand and protecting domestic production. 
Reduced industrial product taxes on car purchases, new lines of 
credit for auto parts companies, the government acquisition of a 
large auto loan institution and a recently announced and rescinded 
import licensing requirement for imported cars (reftel D), are new 
GoB strategies intended to safeguard one of Brazil's largest 
manufacturing sectors that saw monthly car sales in December drop by 
over 20% from its high in June of 2008 (reftel C)and increased 
unemployment that contributed to the national job loss figure of 
650,000 reported for December (reftel E). End Summary 
 
 
DOMESTIC CONSUMPTION STIMULUS: SUCCESS? 
--------------------------------------- 
 
¶2. (SBU) The GoB has announced a reduction in the industrial 
products tax (IPI) for cars. The tax, levied on most domestic and 
imported manufactured products and assessed at the point of sale by 
the manufacturer, was suspended on small car sales (from 7% to 0%) 
and reduced by 50% on large car sales (from 13% to 6.5%).  The 
reduction, announced in December 2008 and scheduled to expire on 
March 31 2009, is designed to be a short term stimulus for the auto 
industry.  Preliminary data indicates that Brazil's January car 
sales will exceed December's sales.  Brazil's national car 
association (ANFAVEA) is forecasting January car sales of 215,000 
compared to 195,000 in December, noting that the IPI reduction, 
which has reduced car prices from 5-10%, is already having a 
positive effect on demand.  ANFAVEA also predicted that February 
sales would exceed January's.  Toyota is rumored to have a waiting 
list again for new car deliveries and GM's Human Resources Director 
Edson Vaz confirmed that GM Brazil has cancelled its employee 
partial-pay extended leave program that was scheduled to start the 
beginning of February at the Gravatai Plant (Rio Grande do Sul 
State) in view of the increased demand for their 1.0 L vehicles due 
to the reduction of the IPI tax. A GM dealer in the Sao Paulo 
commented to Sao Paulo Econoff that sales have recovered because of 
the IPI tax and that business is picking up, but not at the same 
pace as before the crisis.  Expressing uncertainty of what to expect 
after the IPI tax expires at the end of March, the dealer said that, 
despite dealerships being better off now than just a few months ago, 
car sales remain well below previous months' averages and staffing 
has not returned to pre-crisis levels. 
 
¶3. (SBU) Further clouding the sector's future and possibly affecting 
additional government programs aimed at stimulating domestic 
consumption is the current used car glut.  The GM dealer explained 
that although the surplus has reduced used car prices and increased 
sales, it also has negatively impacted new car sales to those 
potential buyers relying on a high trade-in value of their used car 
in order to finance their purchases.  The dealer confirmed that the 
business environment for car dealers is still very bad, but remains 
hopeful that the IPI tax reduction affect will bolster February's 
numbers. 
 
CREDIT CRUNCH- GOVERNMENT INTERVENTION 
-------------------------------------- 
 
¶4. (SBU) Attractive auto financing, a key contributor to Brazil's 
auto sector growth, significantly dried up as a result of the global 
downturn (reftel C), prompting the GoB to inject liquidity into the 
system and increase credit availability through the acquisition of a 
key auto lending institution.  The GoB announced in November 2008 
that Brazil's National Development Bank (BNDES) would provide loans 
of R$ 6.9 billion to small businesses and the automotive sector to 
ensure liquidity, production, sales and employment.  The decision 
was made during a meeting with President Lula and the social and 
economic development ministries.  The Minister of Finance, Guido 
Mantega, explained that R$ 4 billion of the loans would be targeted 
for the automotive industry with the objective of offering increased 
consumer financing options.  Banco do Brasil recently purchased a 
49.9% share in Banco Votorantim under provisional measure 443, 
another response to the global economic downturn which allows the 
purchasing of private financial institutions by Brazil's 2 main 
public banks. Banco Votorantim is a large corporate credit supplier 
as well as a major auto lender in Brazil, and with the purchase of 
49.9% of Banco Votorantim, Banco do Brasil expects a 21% increase in 
the financing of cars through the expansion of credit. Banco do 
 
BRASILIA 00000141  002 OF 002 
 
 
Brasil, the largest publicly owned bank in Brazil, announced in 
January the availability of R$3 billion in loans for auto companies 
to finance the payment of taxes and employee bonuses. This line of 
credit will be available until March 2009. The GoB also announced 
that it would extend the corporate tax filing deadline for auto 
companies by 10 days. 
 
IMPORT LICENSES 
--------------- 
 
¶5. (SBU) Brazil's Ministry of Trade (MDIC) announced January, 27 
2009 broad new import license requirements for imported products, 
impacting approximately 60% of Brazil's imports, including autos. 
The inadequately vetted measure was reportedly taken in response to 
a rapid decline in Brazil's trade balance. Preliminary data just 
released indicated that Brazil will record a January trade deficit 
of roughly 600bn USD, its first monthly trade deficit in nearly 8 
years. By comparison, Brazil recorded a trade surplus of 900mn USD 
in January 2008. 
 
AUTOS NOT THE ONLY SECTOR 
------------------------- 
 
¶6. (SBU) MDIC and Receita sources have indicated GOB is continuing 
to develop measures to provide relief for Brazilian industry, with 
particular focus on exporters.  According to Receita, some measures 
will create permanent regulations for actions already taken ad hoc. 
Press reports this week indicate that exemptions for taxes on the 
importation of inputs and income tax exemptions for product 
certification costs overseas, among other potential measures, are 
being developed.  Central Bank President Meirelles indicated this 
week that the Central Bank will expand the use of reserves to 
guarantee export financing.  GOB hopes to table a package of 
measures by the end of February.  Receita sources have highlighted 
the difficulty in targeting measures that provide relief for 
Brazilian industry while preserving tax revenues needed to fund the 
budget.  MDIC sources have noted the need to focus on positive 
measures that promote exports without penalizing imports Brazil 
needs. 
 
¶7. (SBU) Comment: The Brazilian Government has seen a need to 
address the sagging automotive industry that is a key sector in 
President Lula's economic growth plan strategy. To date, it has 
taken a series of ad hoc and temporary measures such as the IPI tax 
break and the Bank of Brazil loan program.  Mission expects further 
measures to address flagging Brazilian industry, for autos as well 
as other sectors, to be announced in February.  End Comment. 
 
Sobel