Brazil: Reindustrialization through Subsidies
The Brazilian government aims to revive the automotive sector through subsidies and tax reductions, responding to declining car sales. However, the measures have two shortcomings. They mostly benefit higher-income earners, not lower-income households, and support a polluting industry instead of promoting clean energy. The program's estimated cost is $100 million, possibly higher. The Brazilian Development Bank reintroduced subsidized credit, but it's unclear how it will be financed. Similar measures in the past were ineffective, and these may not be appreciated by market participants.
Figure 1: Industry Participation on the GDP
Source: IBGE and Continuum Economics
The Brazilian government recently introduced a set of measures aimed at revitalizing the automotive sector. These measures primarily involve offering subsidies for car production, with a focus on reducing federal taxes to make the final product more affordable. The government's decision to take action is in response to a decline in car sales over the past few months, indicating the need to reindustrialize the country.
However, we believe there are two critical shortcomings in these measures. Firstly, while the government intends to make cars more affordable for lower-income households, the high prices of vehicles in Brazil make it evident that the measure will predominantly benefit higher-income earners. This means that the subsidies, which result in revenue losses, are essentially directed towards the wealthiest portion of the population.
Secondly, there is a concern regarding the environmental impact of these measures. Instead of promoting clean energy/electric vechiles and incentivizing sustainable practices, the Brazilian government is inadvertently supporting a polluting industry that relies on outdated technology. This approach contradicts the goal of fostering clean industry and collective transportation. The government estimates the total cost of the program to be around USD 100 million, although unofficial estimates suggest that it could be as high as USD 500 million.
Figure 2: Car Sales (12-months sum, 2019 =100)
Source: ANFAVEA
Additionally, the Brazilian Development Bank (BNDES) has reintroduced subsidized credit for select industry sectors, offering interest rates below its own cost of capital. In the past, the National Treasury covered the additional costs associated with these subsidies. However, it remains unclear whether this new measure will be financed through transfers from the federal government or by utilizing BNDES reserves.
It is important to note that during the Dilma government and previous mandates of Lula, similar measures of tax reduction and subsidized credit were implemented to stimulate industrial production. However, these measures proved to be ineffective as the industry's contribution to total GDP continued to decline. We believe that this set of measures may have a similar effect and may not be well-received by several market participants.