Brazilian Capital Controls Are ‘Appropriate’ Tool, IMF Says

Brazil’s use of capital controls is an “appropriate” tool to manage foreign investment inflows though the government needs to monitor distortions generated by their use, the International Monetary Fund said.

Latin America’s largest economy’s outlook is “favorable” while showing signs of “overheating,” the IMF’s executive board said in a statement today following the conclusion of its periodic review of the country’s finances. The government should consider cutting spending further as a way to slow inflation, reduce the need for higher interest rates and curb inflows.

President Dilma Rousseff’s government has blamed the U.S. for sparking a global “currency war” by keeping interest rates near zero, precipitating a flood of investment into emerging markets that’s causing currencies to rally. Last week, Brazil slapped a 1 percent tax on bets against the U.S. dollar in the futures market after the real reached a 12-year high.

The IMF, while not commenting on any specific policy, said authorities’ use of “capital flow management measures has been appropriate.”

“However, a number of Directors cautioned that these measures are prone to circumvention,” the Washington-based lender said. “Attendant costs should also be taken into account” for possible “distortionary effects,” the IMF said.

IMF chief economist Olivier Blanchard, at an IMF-sponsored seminar on capital flows held in Rio de Janeiro in May, said that a recent surge in Brazil’s foreign direct investment is “suspicious” and signal that portfolio investors are finding ways to get around government controls.

FDI inflows exceeded economists’ forecasts in June, jumping to $5.5 billion from $4 billion in May, the central bank said.

Since October, Brazil has also tripled to 6 percent a tax on foreigners’ purchase of bonds and raised the cost of foreign borrowing for businesses and debt sales abroad by banks.

The IMF left unchanged its June forecast for Brazil’s economy to expand 4.1 percent this year

To contact the reporter on this story: Alexander Ragir in Rio De Janeiro at aragir@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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