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Thu, Jul 24, 2003 - Page 12 News List

Volkswagen stays optimistic in Brazil, despite economy

REUTERS , SAO PAULO, BRAZIL

Fernando Moreira da Carvalho adds up sales figures at a Volkswagen dealership in Sao Paulo and the bottom line isn't pretty.

With Brazil's economy in the dumps, and consumers counting every penny, sales at the firm are about half of what they were this time last year.

But Carvalho is optimistic that business will improve, even as Volkswagen AG said on Monday it was cutting 4,000 jobs as part of a wider restructuring in the country.

"Interest rates are too high," he said on Tuesday. "The fundamental thing is to lower taxes and interest rates because the recovery in people's wages is going to take time."

As one of the largest companies in Brazil, Volkswagen has long been closely tied to the ups and downs of the economy, and its problems speak volumes about the current state of Latin America's largest country.

"The layoffs are a reflection of the serious situation this country is in," said Marcelo Moller, an auto industry specialist at Roland Berger Strategy Consultants in Sao Paulo.

"The automotive industry has one of the most extensive production chains, stretching from the dealerships to the guy mining iron to make metal slabs," he said, noting that the automotive sector accounts for about 2 percent to 3 percent of Brazil's GDP.

Since taking office six months ago, the left-leaning administration has been largely focused on taming inflation. Interest rates have been raised twice in the past six months even though they were at four-year highs.

Tight monetary policies have brought inflation under control, but have also stymied growth.

Industrial production grew 0.1 percent in May from April and GDP fell by 0.1 percent in the first quarter compared to the previous three months. Some economists reckon GDP contracted again in the second quarter, meaning the Brazilian economy has slid into recession.

The situation is far from the "growth show" promised by President Luiz Inacio Lula da Silva.

But that may change, and Carvalho still may get his wish for more tax breaks and lower interest rates.

Brazil is reportedly looking at ways of jump starting the automotive sector, such as giving hard hit Brazilian consumers tax breaks for buying new cars.

Interest rates could also improve. Brazil's Central Bank is expected to cut its benchmark lending rate by around 1.5 percentage points on Wednesday, after cutting by a half point last month.

At 26 percent, the bank's Selic rate is one of the world's highest, and in Brazil banks regularly charge more than twice that amount to offset high reserve requirements and lax bankruptcy laws.

But the government is working to reform the bankruptcy code to make it easier for creditors to collect debts, and economists speculate the Central Bank may relax reserve requirements.

"It's a whole big picture of things that go together. Just cutting one isn't going to make a whole lot of difference," said Douglas Smith, chief economist for the Americas at Standard Chartered Bank in New York.

"Certainly no big Selic cut makes sense without lower reserve requirements."

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