Rousseff Consumer Subsidy Fails to Ignite Brazil Growth: Economy

Brazil’s retail sales rose less than analysts forecast in September, highlighting concerns that President Dilma Rousseff’s efforts to fuel demand with tax cuts will fail to spur economic growth.

Sales rose 0.5 percent in September, less than the median estimate of 0.8 percent from 38 economists surveyed by Bloomberg. Purchases grew 3.2 percent in the third quarter from the prior period.

Economists are lowering 2014 growth estimates for Latin America’s largest economy, even after the government cut taxes by more than 13 billion reais ($5.6 billion) this year and offered 18.7 billion reais in subsidized credit for consumer goods. The policies are hurting business confidence and investment by widening the budget deficit and sparking inflation, said Jankiel Santos, chief economist at Banco Espirito Santo de Investimento in Sao Paulo.

“You’re not really creating a sustainable way of growing,” Santos said by telephone. “You’re just having short-lived moments of growth. At the end of the day all they really want to do is stimulate demand and keep people happy with the possibility of buying things.”

Analysts surveyed by the central bank have cut their 2014 growth forecast by more than a percentage point, to 2.11 percent, since Rousseff five months ago announced below-market interest rates for purchases of everything from televisions to furniture by low-income Brazilians.

Pent-Up Demand

A good part of consumers’ pent-up demand has already been met, so it will be ever more difficult to sustain retail sales growth with tax breaks and other incentives, said Ronaldo Kasinsky, retail analyst at Banco Santander Brasil SA in Sao Paulo.

“Investors are starting to worry this isn’t stimulating growth, and we’re starting to have fiscal problems,” Kasinsky said by telephone. “I think we’re coming to a crossroads where stimulus no longer has as much effect, and the government’s entire fiscal policy starts getting questioned.”

September sales of furniture and appliances fell by 0.2 percent, down from a 0.5 percent increase in August and a 2.5 percent jump in July. The Ibovespa index rose less than 0.1 percent at 2:25 p.m. in Sao Paulo.


“Consumption seems to have softened a bit after a mini-boom in July and August, and purchase of big-ticket items may be particularly weak,” Neil Shearing, chief economist for emerging markets at Capital Economics Ltd., said by phone from London.

The government may eliminate tax cuts on cars, appliances and furniture amid increasing speculation that the nation’s credit rating will be downgraded. Brazil will end some tax breaks on consumer goods to shore up public finances, Treasury Secretary Arno Augustin said in an interview at his Brasilia office on Nov. 7.

Brazil’s budget deficit widened to 3.3 percent of gross domestic product in the 12 months through September, more than analysts expected and the highest since November 2009, the Treasury reported on Oct. 31. The primary budget surplus, which excludes interest payments, fell to 1.6 percent of GDP in the 12 months through September, below the Finance Ministry’s 2.3 percent goal.

The effort to cut the budget shortfall will be hampered by next year’s presidential election, which will make it harder to contain spending, Santos said.

S&P Rating

The worsening fiscal situation in part prompted Standard & Poor’s in June to place Brazil’s rating on negative outlook, and Moody’s last month to lower its outlook to stable from positive. Five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, rose 57 basis points in the month through yesterday, to 207, the highest level in more than two months.

Retailer shares as measured by the MSCI index of Brazilian consumer-discretionary stocks have underperformed the broader Ibovespa stock index this year, posting a loss of 21.9 percent through yesterday, compared with a 15 percent decline for the benchmark measure.

“Optimism is more a function of the past than of the future,” Carlos Thadeu de Freitas Gomes, chief economist at the National Commerce Confederation and a former central bank director, said by phone from Rio de Janeiro. “Retail sales will grow less next year, because families are more indebted, they’re somewhat uncertain about their employment, and interest rates went up. There’s not as much confidence as there was.”

Household Debt

Household debt in August reached 45 percent of disposable income, its highest level on record, according to data from the central bank. Retail sales grew at an average annual 8.4 percent pace in the six years through 2012, with a peak of 10.9 percent in 2010. Purchases in the 12 months ended in September rose 4.8 percent, the weakest year-over-year advance in more than nine years and down from 8.3 percent in January.

Consumers’ purchasing power has also been whittled away by inflation that has remained above the government’s 4.5 percent target throughout the almost three years of Rousseff’s administration. Twice this year inflation breached the 6.5 percent ceiling of the target range, which allows for two percentage points above or below the target. In a bid to tame price increases, the central bank this year has raised its Selic rate by 225 basis points, more than any other benchmark rate in the world tracked by Bloomberg, to 9.5 percent.

Still Shopping

Consumers are still shopping, if at a slower pace. “The retail sales numbers came in a little weaker, though without having been a negative number,” Carlos Kawall, chief economist at Banco J. Safra, said by phone from Sao Paulo about today’s data. “Consumption continues at a good level, even if the data were outside consensus.”

While inflation in October slowed to 5.84 percent, economists surveyed by the central bank project it to accelerate to 5.93 percent next year.

At the same time, retailers are betting soccer’s World Cup, the world’s most-watched sports event that Brazil will host next year, will buoy demand for goods as the government bankrolls purchases by low-income families. “Live the World Cup of your life,” says a banner ad for Sony televisions on the website of Brazilian electronics retailer Ponto Frio.

“If a family just wants to swap its old television for a new digital one, one of those nice modern ones, to watch the World Cup games, that family can ask for the credit,” Rousseff said on radio program “Coffee with the President” the week after announcing the My Better House financing program.

Interest Rates

The 18.7 billion-reais program provides up to 5,000 reais for consumers in a country where the average monthly salary is less than half that. The interest rate of 5 percent is almost half the 9.5 percent benchmark rate, and beneficiaries have four years to pay up.

The stimulus is a boon, and next year’s spectacle, plus the presidential election, create opportunities to sell TVs and other goods, according to Eneas Pestana, CEO of Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s largest retailer and the majority stakeholder in Ponto Frio. Shares of the company climbed 18.6 percent this year through yesterday.

With retailers’ past growth rates difficult to repeat, continued government incentives would at least help provide stability, said Julia Monteiro, retail analyst at Caixa Geral de Depositos in Rio de Janeiro. Stimulus will also help sustain Rousseff’s popularity in the run-up to the election, she said.

“People don’t want to lose their purchasing power,” Monteiro said on Oct. 31 by phone. “They never had access, and now they have the right to access. If they lose it, they’ll start having a bad impression of the government.”

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