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End of QE2 Won´t Ease Capital Flows Much, Blanchard Says

Capital flows to emerging markets won’t significantly slow when the U.S. Federal Reserve ends its bond-purchasing program known as quantitative easing, said Olivier Blanchard, chief economist at the International Monetary Fund.

“QE2 has only a marginal impact on flows,” Blanchard, referring to the Fed´s program to stimulate the U.S. economy, told reporters at an IMF-sponsored event in Rio de Janeiro. “As QE2 is phased out I don’t expect it will lead to a significant change in capital flows.”

Blanchard’s remarks contradict the position of Brazilian Finance Minister Guido Mantega, who has complained that the Fed´s asset purchases are causing a flood of “hot money” to emerging markets, fueling inflation and currency gains. Mantega said April 27 that he hoped Fed Chairman Ben S. Bernanke won’t announce another round of quantitative easing.

Blanchard also said that a recent increase in Brazil’s foreign direct investment is “suspicious,” since investors may be disguising portfolio flows to circumvent government restrictions.

Inflow Shift

FDI inflows exceed economists’ forecasts for a tenth straight month in April.

The country received $23 billion in FDI in the first four months of this year, from $7.7 billion in the same period in 2010. Foreign investments in shares and domestic bonds fell to $532 million from $14.3 billion over the same period.

Brazil’s government suspects “irregularity” in inflows registered as foreign direct investment and may ask the tax agency to open a probe, Estado de S.Paulo newspaper reported March 24.

As part of efforts by Brazilian President Dilma Rousseff’s administration to stem the real’s gains, the government on March 29 increased to 6 percent a tax on new corporate loans and debt sales abroad by banks.

A few days later, Rousseff applied the higher tax to renewed, renegotiated, or transferred loans of up to two years in length.

Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months.

In October, Brazil tripled to 6 percent a tax on foreign investors’ fixed-income purchases. Last year, Mantega said that countries were competitively devaluing their exchange rates in a global “currency war.”

Permanent Flows

Blanchard, speaking to reporters, said today that the share of emerging market assets held by portfolio investors globally still has more room to rise, as faster economic growth in Latin America and Asia attract capital.

He said policy makers should use other instruments -- interest rates, fiscal policy, foreign currency reserves accumulation and other macro-prudential tools -- before resorting to the use of capital controls to fend off ”excessive´´ inflows.

Nicolas Eyzaguirre, the IMF´s Western Hemisphere director and a former finance minister in Chile, said that policy makers in Latin America should be ready to withstand pressure on their currencies in coming years by finding ways to boost productivity and increase savings.

”Make no mistake, there´s part of this that is permanent,´´ he said at the same event, which brought together central bankers from Thailand, Turkey, Colombia and Chile to discuss capital flows to emerging markets.

The real gained 1.2 percent to 1.5960 per U.S. dollar at 4:21 p.m. New York time. The currency has appreciated 45 percent against the dollar since 2009, the best performer of 25 emerging market currencies tracked by Bloomberg.

-- With assistance from Iuri Dantas and Andre Soliani in Brasilia. Editors: Joshua Goodman, Robert Jameson

Matthew Bristow in Brasilia at

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