Brazil Imposes 6% Tax on International Bonds Due to Curb Real Appreciation
Brazilian President Dilma Rousseff raised taxes on corporate loans and debt sales abroad by banks in a bid to contain a 39 percent gain in the real since the end of 2008. The real erased this year’s losses and yields on interest-rate futures rose.
Brazil imposed a tax of 6 percent on international bond sales and loans with an average minimum maturity of up to 360 days, according to a decree published today in the Official Gazette. Companies had paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months.
“There’s a strong movement toward getting credit overseas, for obvious reasons, as credit is much cheaper there,” Finance Minister Guido Mantega said today. “Three-month loans are not for investments. The inflow of dollars is too strong, damaging the exchange rate, appreciating the real and harming exporters. We want to avoid that.”
Countries across Latin America are buying dollars while nations including Brazil and South Korea raise taxes on foreign purchases of bonds to stem currency gains that hurt exporters. Mantega said in September that Brazil is a victim of a “currency war” in which nations seek export advantages by competitively weakening their currencies.
Contain the Real
Speaking to reporters today in Brasilia, Mantega said the increase of the so-called IOF tax on foreign borrowing aims to avoid further appreciation of the real while reducing the exposure of companies and banks to debt in a foreign currency. The government may adopt new measures on loans maturing longer than 360 days if it detects an increase in such inflows, he said.
“The measure will restrain foreign loans,” Luciano Rostagno, chief strategist at CM Capital Markets brokerage said. “We were having huge inflows from companies and banks and that partly explains why the central bank’s been trying other tools to fight inflation and avoid an appreciation of the currency.”
The tax increase also targets banks transferring cheaper credit to clients at a moment when the central bank is raising interest rates and requiring higher reserves and capital levels to slow the pace of loans in Brazil, Mantega said.
The exchange rate may not show an immediate reaction to the higher levy as there are external factors influencing currency inflows, Mantega said.
The real erased this year’s losses, rising 0.4 percent to 1.6561 per the dollar at 12:53 p.m. New York time. Yields on interest-rate futures market rose for the five most traded contracts today. The yield on the contract maturing in January 2013, the most traded today in Sao Paulo BM&F Bovespa stock exchange, rose five basis points, or 0.05 percentage point, to 12.78 percent.
The higher levy on foreign borrowing might help avoid a further appreciation of the real “in the short term” while failing in the medium term, Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a telephone interview.
“If the intention is an immediate containment of capital flows it might have some effectiveness,” Santos said. “In the medium term, a weak dollar in the world, strong economy in Brazil and interest rate differential will remain to stimulate the flow of currencies.”
Brazil’s inflation, as measured by the IPCA-15 consumer price index, quickened to 6.13 percent in the year through mid- March, the highest level since November 2008.
Higher taxes on foreign loans “won’t work” either to control inflation or weaken the currency, said former central bank President Carlos Langoni, director of the Getulio Vargas Foundation in Rio de Janeiro. Only raising interest rates will help cool inflation, he said.
The central bank has raised borrowing costs five times since last April, pushing the Selic to 11.75 percent, from 8.75 percent a year earlier. The benchmark rates in the U.S., Japan and Europe are no higher than 1 percent.
Central bank President Alexandre Tombini signaled last week that policy makers may adopt new measures to curb consumer credit growth as part of a group of measures to contain demand in Brazil.
The higher IOF tax on foreign loans will also reduce the credit available in the economy by reducing liquidity, in a move that may help contain inflation, Luiz Fernando Figueiredo, founder of Maua Investimento LTDA and a former central bank director, said at the Bloomberg Brazil Economic Summit in Sao Paulo today.
The government tripled a tax on foreign investors’ fixed- income purchases to 6 percent in October as part of the effort to stem gains in the real. The central bank has bought $18.8 billion dollars in the spot market, or 45 percent of the record amount it purchased last year. Additionally, the bank set reserve requirements on short dollar positions held by local banks in January and bought dollars in the futures market for the first time in 21 months.
At 5.7 percent, Brazil’s inflation-adjusted interest rate is the highest in the Group of 20 nations, according to data compiled by Bloomberg.
Brazil’s real has gained 39 percent against the U.S. dollar since the end of 2008, the most among 25 emerging market currencies tracked by Bloomberg.
“It’s not time to adopt currency measures -- the government should instead increase productivity by stimulating the import of capital goods,” Andre Perfeito, chief economist at Gradual Investimentos in Sao Paulo, said before the announcement. “The real is strengthening because Brazil is attracting capital and the country’s interest rates are high. New measures may keep investors away from the country.”
The efforts were dwarfed by increasing foreign investment as Latin America’s biggest economy builds roads and airports to host the 2014 World Cup and 2016 Olympics.
Net foreign-currency inflows to Brazil from trade and financial transactions amounted to $24.4 billion this year, exceeding the total amount in all of 2010, according to the central bank.
Foreign investment in Brazilian stocks and fixed-income assets fell 91.4 percent to $206 million in January from $2.39 billion in January 2010, according to the central bank. Foreign direct investment more than quadrupled over the same period, to $2.96 billion, from $600 million.
“We remain very skeptical that any new measures will have a substantial impact on the level of the Brazilian real,” Tony Volpon, a Latin America strategist at Nomura Securities in New York, wrote in a note to clients this month. “The major types of inflows seen in the market are investment-driven. This is the ‘good’ type of inflows that Brazil needs to grow, and we doubt very much that the government will do anything to curtail them.”
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