Brazil Rule Changes to Free 18 Billion Reais for Auto Loans

New rules from Brazil’s central bank will free as much as 18 billion reais ($8.82 billion) for auto financing as policy makers seek to revive economic growth in the world’s biggest emerging market after China.

As part of a stimulus package announced yesterday, the central bank will reduce reserve requirements so lenders can boost credit for car purchases. Taxes on vehicles will also fall while the state development bank channels more subsidized funding to companies that invest in equipment. The measures will cost the government 2.7 billion reais ($1.3 billion) between now and Aug. 31, when most of the measures expire.

“We are facing an escalation of the international crisis,” Finance Minister Guido Mantega told reporters in Brasilia. “This demands that we redouble our efforts to maintain economic growth at a reasonable rate.”

To compensate for the measure that goes into effect today, the central bank will no longer allow larger Brazilian lenders to use inter-bank deposits into smaller rivals to meet some of their reserve requirements, central bank Monetary Policy Director Aldo Mendes said yesterday.

The central bank will also increase to 36 percent the amount of reserve requirements on time deposits that will no longer receive interest payments starting June 22, Mendes told reporters in Brasilia yesterday.

Faltering Expansion

Brazil’s economic expansion faltered in the first quarter even as the government cut borrowing costs to near record lows, reduced taxes on home appliances and boosted subsidized credit. Economists have been cutting their forecast for growth this year, after activity unexpectedly contracted in March.

In exchange for the tax breaks, automakers pledged to cut prices by as much as 10 percent and avoid layoffs, Mantega said.

Vehicle sales fell 11 percent in April from a year ago, according to the National Federation of Automotive Vehicle Distributors, known as Fenabrave. While sales of cars rebounded 5 percent in the first 15 days of May, sales of heavy trucks and buses plunged 28 percent. Fenabrave this month lowered to 3.5 percent its forecast for sales growth this year compared with an estimate of 5.8 percent in January.

Robust demand that led to record sales last year of 5.8 million vehicles had been buoying automakers even as a 24 percent rally in the currency between the end of 2008 and start of this year fueled a surge in imported cars from China, Mexico and South Korea.

Still, with the economy slowing, consumers are being more cautious and banks are restricting credit for car purchases as bad loans mount. The default rate on auto loans rose for the 15th straight month in March to 5.7 percent from 3 percent a year earlier, according to the central bank.

Cheaper credit and longer maturities will help reverse the declining credit performance, Mantega said.

Furloughs

Daimler AG ordered a mandatory nine-day furlough in April for workers at its Mercedes-Benz truck factory outside Sao Paulo, and Ford Motor Co. and Volkswagen AG are also slowing their assembly lines in Brazil, as stockpiles of unsold vehicles increase.

Brazil’s auto industry is the world’s third largest and responsible for 20 percent of the country’s industrial economy, Mantega told reporters yesterday in Brasilia.

Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, fell 0.35 percent in March, after dropping in January and February, the central bank said May 18.

Analysts expect GDP to expand 3.09 percent in 2012, compared with 3.20 percent a week earlier, according to the median estimate in a central bank survey published yesterday.

Interest Rate Cuts

The central bank has reduced the benchmark interest rate by 3.5 percentage points since August, more than any member of the Group of 20 nations, to 9 percent. Traders expect policy makers will lower the rate to at least a record low 8.5 percent next week.

Mantega said GDP growth this year will be higher than the 2.7 percent expansion in 2011, adding the economy will expand at a 4.5 percent annual pace in the second half.

“I can assure you that we are 100 percent, 200 percent, 300 percent prepared” to counter the effects of a worsening global crisis, President Dilma Rousseff said yesterday at an event in the southern state of Santa Catarina.

To contact the reporters on this story: Arnaldo Galvao in Brasilia newsroom at agalvao1@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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