Brazil Raises Tax on Foreign Fixed-Income Investments

Brazil doubled a tax it charges foreigners on investment in fixed-income securities in a bid to stem gains in the real, which reached its strongest in more than two years last week.

The government of Latin America’s biggest economy will raise its so-called IOF tax on fixed-income investments by foreigners to 4 percent from 2 percent beginning tomorrow, Finance Minister Guido Mantega told reporters in Brasilia today. Brazil first slapped a 2 percent tax on foreign investments in October 2009.

Mantega said Brazilian interest rates, at 10.75 percent for overnight loans between banks, are too high and luring speculative capital as the U.S. lets its currency weaken and takes the Chinese yuan with it. The steeper tax discourages such capital inflows into Brazil, he said.

“Many countries are taking currency measures and no one is sleeping on the job,” Mantega said. “The tendency is toward weakening their currencies.´´
The real fell 0.5 percent today to 1.6979 per U.S. dollar, before the Finance Ministry’s announcement. The real has gained 36 percent since the end of 2008, the second-best performer after the Australian dollar among the 16 most traded currencies tracked by Bloomberg.

“The increase in the tax rate was significant,” Silvio Campos Neto, chief economist at Banco Schahin SA, said in a phone interview from Sao Paulo. “At least in the short term the market will see some gains in the dollar.”

Benchmark Rate

Central bank policy makers increased the benchmark interest rate to 10.75 percent from a record low 8.75 percent this year to contain inflation. Brazil’s real interest rate, which takes inflation into account, is the highest amid the Group of 20 nations.

Mantega said the tax measure seeks to protect both exporters and domestic producers that are facing competition from cheaper imports. The minister said he will call on his counterparts at the International Monetary Fund meetings in Washington this week to take coordinated action and resume fiscal stimulus so there’s less need to boost exports.

Trade War

“It’s not only a currency war, it tends to become a trade war and this is our concern,” Mantega said.

Brazil’s trade surplus narrowed to $16.8 billion in the 12 months through September, the lowest in more than seven years, as the cheaper dollar boosted imports and held back exports.

Other Latin American countries are also attempting to curb currency appreciations. Chile’s President Sebastian Pinera said today he will meet with policy makers at the central bank this week to discuss ways to address the currency’s gains. Colombia’s President Juan Manuel Santos called for “bold and creative” action to weaken the Colombian peso in an Aug. 11 statement.

A year ago, Mantega implemented a 2 percent tax on purchases by foreign investors of real-denominated, fixed income securities and on purchases of stocks. He said then the move was to avoid “excess speculation” in Brazil’s capital markets.

The tax increase announced today affects only fixed-income investments.

To contact the reporters on this story: Arnaldo Galvao in Brasilia at agalvao1@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

Oct 4, 2010
By Arnaldo Galvao and Andre Soliani
Source: bloomberg.com