Oct. 20 (Bloomberg) -- Brazilian stocks dropped the most in almost four months and the currency tumbled after the government imposed a tax on foreign purchases of equities and bonds to stem the real’s appreciation.

BM&FBovespa SA plunged 8.4 percent on speculation the tax will curb trading at Latin America’s biggest bourse. Commodity producers Petroleo Brasileiro SA and Vale SA, the most heavily weighted stocks on the index, retreated more than 2 percent. Cia. de Concessoes Rodoviarias, Brazil’s biggest toll-road operator, dropped the most since March on concern demand for its planned share sale will be weaker after the tax.

“Unfortunately this is going to raise in some people’s mind that Brazil remains a risky place to do business,” said Christopher Palmer, who oversees about $5 billion as head of global emerging markets at Gartmore Investment Management Ltd. in London. “How many countries in the world are proposing capital control?”

The Bovespa index slid 2.9 percent to 65,303.11 at 4:20 p.m. New York time. Every stock in the 63-member index declined. The BM&FBovespa Small Cap Index plunged 3.4 percent. The real weakened 2.1 percent to 1.7547 per U.S. dollar, paring a gain this year to 32 percent.

Brazil’s government announced yesterday after the markets closed it will impose a 2 percent tax on foreign purchases of fixed-income securities and stocks starting today. The levy is higher than a previous 1.5 percent tax scrapped a year ago amid the worldwide credit crunch and one that didn’t cover equities.

Strengthening Currency

Finance Minister Guido Mantega said the measure seeks to curb gains in the real, which has strengthened the most of any major currency this year on the back of higher commodity prices, a credit rating upgrade from Moody’s Investors Service and forecasts for faster economic growth. A stronger currency makes the country’s exports more expensive in dollar terms.

“He’s telling us there’s going to be a bubble in the currency, and I agree that we’re getting there,” said Jonathan Asante, who helps manage $7 billion in emerging-market assets at First State Investments in Edinburgh. “I have every sympathy with their problem, and it probably tells you the export sector is suffering -- the non-commodity export sector -- is suffering a great deal.”

Spot trading in the dollar reached a record, with more than $520 million traded today, the exchange said in an e-mailed statement. The previous record was $420.8 million.

The yield on Brazil’s zero-coupon bonds due January 2011 slipped 2.5 basis points to 10.505 percent. The yield on January 2011 interest-rate futures contracts declined four basis points, or 0.04 percentage point, to 10.44 percent.

‘Desperate Move’

Brazil may have difficulty stemming the real’s appreciation through 2011, said Mauro Leos, a credit officer for Latin America at Moody’s Investors Service.

“It will be very difficult for authorities to contain the pressure,” Leos said in an interview in Sao Paulo. “There will be implications on foreign exchange in 2010, possibly 2011.”

The tax measure is unlikely to succeed in stemming the currency’s world-beating rally, Paulo Vieira da Cunha, a former central banker, said.

“It’s a desperate move,” said Cunha, director for international affairs at Brazil’s central bank from April 2006 to January 2008 and now a partner at asset management firm Tandem Global Partners LLC in New York. “This kind of measure does not alter the exchange rate trend” because investors will figure out ways to bypass the tax, he said.

Barclays Plc reiterated its forecast for the real to rise to 1.65 per dollar by the end of the year.

‘Clearly Negative’

“The introduction of the new tax is clearly negative for the markets and should create short-term noise,” wrote Marcelo Salomon and Roberto Melzi. “Once the bad news wears out markets should gradually resume their bullish structural trends.”

Mantega said the move will slow the real’s appreciation by curbing dollar inflows from speculative investment and prevent the creation of bubbles in Brazilian markets. While the levy will dissuade investors seeking short-term gains, it won’t deter investors seeking long-term returns, he said.

“These are to prevent excesses,” he told reporters.

International investors have added 22.2 billion reais ($12.8 billion) to their Brazilian stock holdings in the secondary market this year, according to BM&FBovespa. They’ve also added 11.4 billion reais through purchases of shares in public offerings, data from the exchange show. The inflow helped push the Bovespa up 79 percent this year through yesterday.

BM&FBovespa Plunge

“This will have a short-term impact as investors discount 2 percent from the stocks today” to compensate for the tax, said Fabio Cardoso, who helps manage the equivalent of $175 million as a partner at Adinvest Consultoria in Rio de Janeiro. “People will include this tax in their calculations, but what matters is the companies’ fundamentals,” and those are strong as Brazil’s economy recovers from the crisis, he said.

BM&FBovespa slid 1.14 reais to 12.27 reais. The company will be hurt most by the tax on foreign purchases of fixed- income securities and stocks through lower volumes, Itau Unibanco Holding SA said. The tax will reduce volumes in the Bovespa index and drive business toward Brazilian stocks that have American depositary receipts, Itau said in a note to clients.

‘Armageddon Scenario’

Chief Financial Officer Carlos Kawall said the tax wouldn’t result in an “Armageddon scenario” for trading volumes.

“Not much has changed for foreign investors, given the possibility of trading through ADRs, through share swaps and given the possibility of trading from existing stock of money in Brazil,” Kawall said in a conference call.

Petrobras, as Brazil’s state-controlled oil company is known, fell 2.3 percent to 36.50 reais. Vale slumped 2.2 percent to 40.50 reais.

Cia. de Concessoes Rodoviarias slid 5.6 percent to 33.60 reais. The company last week announced plans to sell 33.3 million new shares. Adinvest’s Cardoso said the tax will likely reduce interest from foreign investors, whom have bought more than half of stocks sold in Brazil this year according to data from the Sao Paulo exchange.

In other Latin American markets, Mexico’s Bolsa index rose 0.2 percent and Chile’s Ipsa index dropped 0.3 percent.

To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; Emily Schmall in Mexico City at eschmall@bloomberg.net

Last Updated: October 20, 2009 17:56 EDT