Brazil Broadens Scope of Foreign Capital Tax to Curb Real

Brazil is ready to take more measures to stem a rally in the real, the world’s second-best performing major currency in 2012, after a decree broadened the scope of a tax on companies raising funds in the international market, Finance Minister Guido Mantega said.

The government today imposed a levy on foreign loans and bonds with durations of three years or less. The 6 percent tax, which takes effect immediately, was previously applied to foreign borrowing of up to two years, according to a decree published today in the official gazette.

Measures available to protect Brazil from surging global liquidity include using the sovereign wealth fund to buy dollars, intervention by the central bank in the spot and futures market, and taxes on derivatives, said Mantega, who ruled out a levy on foreign direct investment to stem the real’s gains. While the U.S., Europe and Japan keep rates near zero, Brazil pays investors the highest inflation-adjusted benchmark interest rate within the Group of 20 nations.

“The government won’t be a passive observer in this currency war,” Mantega told reporters today in Brasilia. “The government will continue to take measures to prevent the real from strengthening, from hurting Brazil’s manufacturers.”

Real, Maturities

The real strengthened 0.2 percent at 1.7142 per U.S. dollar at 6:04 p.m. in Sao Paulo, after Mantega ruled out taxing FDI flows as part of the plan to curb the rally. He also said the central bank’s dollar purchases have been enough and there is no need to use the sovereign wealth fund to reinforce the intervention in the spot market for the moment.

The currency dropped 1.3 percent to 1.7174 yesterday, the biggest decline since Dec. 12, after a Bloomberg News report that the government was considering measures to stem the currency rally.

Brazil resumed efforts to rein in currency gains last month, with the central bank buying dollars in the spot and forward markets. The bank also auctioned currency swaps yesterday.

“There is a currency war based on an expansionary monetary policy that creates unfair conditions for competition,” President Dilma Rousseff said in an event today in Brasilia.

The impact of the measure announced today may be limited because most foreign borrowings by companies have maturities longer than three years, said Italo Abucater, head of currency trading at Icap do Brasil DTVM.

“Currently, most of operations are of five to 10 years,” Abucater said.

‘More Steps’

Brazil’s benchmark interest rate discounted by inflation is at 4.3 percent a year, after the central bank reduced the Selic rate by half a percentage point at each of its four previous meetings. Inflation slowed to 6.22 percent in January, remaining above the 4.5 percent inflation target for the 17th straight month.

The real gained 8.9 percent this year, the second-best performer amid the 16 most-traded currencies tracked by Bloomberg. The Mexican peso has gained 9.4 percent.

Mantega said that a real trading at 1.50 to 1.60 per U.S. dollar is “bad” for the economy, adding the government doesn’t seek a specific exchange rate.

“We are likely to see more steps, more measures,” Flavia Cattan-Naslausky, local markets strategist at Royal Bank of Scotland, said. “We will continue to see pressure on the real to appreciate.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE