Brazil Rolls Back Currency War Capital Curbs as Real Drop

Brazilian President Dilma Rousseff is rolling back curbs on foreign capital imposed in the past 19 months after the real posted the biggest loss of any major currency this year.

The government exempted foreign loans with a duration of more than two years from a 6 percent tax to help companies and banks rollover debt, said Finance Minister Guido Mantega. The financial transaction tax was previously charged on loans taken abroad with a duration of as many as five years.

The tax was one of a series of measures taken to weaken the real and protect exporters from what Rousseff dubbed “a monetary tsunami” unleashed by rich nations seeking to devalue their currencies. Mantega said today that the “excessive liquidity” that led to capital controls ended with the worsening of the European debt crisis.

“Before the crisis worsened, it was easier to have access to long-term credit,” Mantega told reporters in Brasilia. Brazilian banks and companies “need to rollover loans taken in the past, and this makes it easier.”

After being the best performing major currency in the first two months of the year, the real reversed course and plunged, raising concern the move could stoke inflation as imports became more expensive.


Since the start of March, the real has weakened 17 percent, the worst performance of the 16 most-traded currencies tracked by Bloomberg. The real was little changed at 2.0716 per U.S. dollar at 1:05 p.m. New York time.

The currency will strengthen to 1.89 per U.S. dollar in the fourth quarter, according to the median estimate in Bloomberg survey of 26 analysts.

Today’s move “is very symbolic -- it shows the government is very worried with the impact of the international situation and has no interest in keeping the real above 2 per dollar for a long period,” Roberto Padovani, chief economist at Sao Paulo-based Votorantim Ctvm Ltda, said in a phone interview. “The weaker real puts pressure on inflation and may limit the room for interest rate cuts.”

Rousseff’s administration has reduced the benchmark interest rate to a record low, cut taxes on credit and consumer goods and boosted subsidized loans to companies in a bid to reignite economic growth amid slower global expansion.

Growth Forecasts

Economists covering the Brazilian economy reduced their 2012 economic growth forecast for a fifth straight week on June 8. The world’s biggest emerging market after China will expand 2.53 percent this year, less than the 2.73 percent growth rate posted last year, according to the median estimate in a central bank survey of about 100 analysts.

Brazil had net inflows of $843 million this month through June 8, following a $2.69 billion outflow in May, according to central bank data released yesterday.

Today’s measure is probably “the first move in dismantling what has become a complex web of controls over capital inflows,” Tony Volpon, the head of emerging-markets research for the Americas at Nomura Holdings Inc., wrote in a note to clients. “Nonetheless, we think it signals that the government, after years of fighting the ‘currency war’, recognizes the need to help roll over foreign indebtedness.”

Mantega said the government isn’t considering the reversal of other measures taken to curb capital inflows.

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