Brazil & Southern Cone - January 2016 (ISSN 1741-4431)

According to a recent report in the daily Folha de São Paulo, 38 of Brazil’s 50 most populous municipalities saw a drop in tax receipts in 2014-2015.

Public finances in both states and municipalities are feeling the strain. Falling economic activity has led to a drop in municipalities’ main source of income: the Imposto Sobre Serviços (ISS), a tax paid by service providers. Similarly, states have lost out on income from the Imposto sobre Circulação de Mercadorias e Serviços (ICMS), a value-added tax on sales and services. But the federal government has also been blamed for cuts to the funding it gives to municipalities. On average, the federal government handed out 5.7% less in 2015 than 2014.

Of the 50 municipalities surveyed by Folha, Salvador, home to 60m Brazilians, in the north-eastern state of Bahia, was the worst affected, with a 17.7% drop in tax revenues in 2015. Other cities badly affected include three in the state of Rio de Janeiro: Campo dos Goytacazes, Nova Iguaçu, and Belford Roxo. The city of Rio de Janeiro itself received 3.9% less in 2015, while the city of São Paulo’s tax take was down by 2.4%. With revenues down, investment in these cities has also taken a hit, down by 16% on average across the 50 municipalities.

With the exception of Rio de Janeiro, which is preparing to host the Summer Olympic Games in August next, all the other Fifa World Cup 2014 host cities have seen falls in investment. In Natal, Rio Grande do Norte, for example, investment is down by 91%. “The indebtedness of the municipality was increased by the World Cup projects”, Dionísio Gomes, the comptroller of the city, told Folha. In 2015 the city made no new loans.

In order to balance the books, municipal governments are looking to cut spending. In Manaus, Amazonas, nine schools are due to close, affecting 2,300 pupils. In Goiânia, Goiás, the municipal government is reducing its office hours as a way of cutting costs on energy and communications. Despite the cuts, however, individual salaries remain unaffected. Four municipalities have already been warned by the federal financial ombudsman that salaries are over the legally proscribed limit. Nova Iguaçu spends 60.8% of its income on personnel.

Auto sector sales down by over a quarter in 2015

The automotive industry  – long one of the key barometers of the Brazilian economy – is ailing. Latest data from Brazil’s national association of automotive manufacturers (Anfavea) reported a 26.6%  year-on-year fall in new registrations (ie new sales) in calendar 2015 to 2.57m units (comprising cars, buses and trucks), the weakest result since 2008.

The figure would have been much worse but for year-end firesales across the industry in November and December. While many vehicles are assembled in Brazil, many of the parts are imported. The fall in the value of the Real has weighed down the industry, as has an increased tax burden and the high level of inflation. As a result, many vendors have been forced to put up prices, further depressing demand.

According to Anfavea, carmakers have cut around 28,000 jobs in the past two years, despite the fact that the likes of BMW, Audi and Chery have started assembling vehicles in the country. Around 130,000 Brazilians are still employed by the sector, but many of them have seen their hours reduced as production lines are put on temporary hold. Germany’s Volkswagen Group remains the leading vehicle-seller in Brazil, followed by Toyota, General Motors (GM), Hyundai, then Ford.

Marcos Munhoz, the vice-president of GM in Brazil, said that the last two years have been “challenging” for the industry. “We’ve been hit by an increase in costs, an increase in interest rates and taxes, as well as the slump in consumer confidence”, Munhoz told the daily Folha. Nevertheless, GM intends to maintain its R$13bn (US$3.2bn) investment plan in the country for the 2014-2019 period. Car sales are expected to continue their decline in 2016, falling by a further 5% year-on-year, according to the national federation of car dealers (Fenabrave).

Protests over New Year’s bus ticket rises

Bus fares in at least 18 Brazilian cities, including São Paulo and Rio de Janeiro, went up by over 10% in early January. On 8 January, led by the civil society organisation Movimento Passe Livre, thousands took to the streets in both cities in protest; in São Paulo there were minor clashes with the police. Days later there were further sizeable protests in São Paulo, prompting an aggressive crackdown by police and dozens of arrests.

Fares have gone up in at least 18 major cities. In Rio, the increase was from R$3.40 (US$0.84) to R$3.80 (US$0.94), an above-inflation rise of over 11%. The cost of trains and boats in the city also rose significantly. In São Paulo, the increase was from R$3.50 to R$3.80. According to Movimento Passe Livre, cumulative inflation between 1994 and 2015 rose by 443%, while bus fares have risen by 985% during the same period.

Whereas many of the major protests seen last year drew their numbers from the upper-middle classes, bus fares are an issue that directly affects the majority of Brazilians. An increase in bus fares in São Paulo was the spark that led to the unprecedented demonstrations across the country in 2013. Although a repeat of 2013 seems unlikely at this point, with the economy in recession for a second year, millions of Brazilians are feeling the pinch. For the government the main fear will be that the ranks of any demonstrations this year will be swelled by its working-class base. In 2015, many of the protesters were dismissively referred to as “coxinhas”, a nickname for the white elite; but if the “povão”, or masses, turn against the government it could be hard for President Rousseff to stay in office.