Brazil Tax May Encourage More Measures, Dennis Says

Brazil’s success in curbing the rally in the real by imposing a tax on foreigners’ purchases of stocks and bonds is a “scary” and “dangerous” precedent, said Citigroup Inc. equity strategist Geoffrey Dennis.

The success of the tax may encourage officials to adopt more measures to stem the currency’s appreciation, Dennis said at a conference organized by the Brazilian-American Chamber of Commerce in New York.

“It’s kind of scary because it might mean that the government wants to do more things over time should the currency stay strong,” Dennis said.

The real has weakened 3.1 percent against the dollar since the government implemented a 2 percent tax on the purchases of equity and fixed-income assets by overseas investors on Oct. 19. The currency surged 33 percent last year, the best performance among 16 major currencies tracked by Bloomberg, as an accelerating economic recovery and growing demand for commodities lured foreign investors to the country.

“Part of the success of the tax comes about because there’s an implicit threat by the government to actually increase the tax if the currency continues to appreciate,” Tony Volpon, a Latin America strategist for Nomura Holdings Inc., said at the conference. “The government has had a surprising success in putting the fear in the carry-trade community.”

In carry trades investors borrow at a low interest rate to invest in markets where returns are higher, earning the spread between the cost of borrowing and the returns on their investment. Brazil’s benchmark lending rate is 8.75 percent, compared with the U.S. Federal Reserve’s near-zero target rate.

Local Debt Sales

Brazil said Nov. 18 it would begin taxing the issuance of depositary receipts in international markets in a bid to prevent companies from selling shares abroad rather than locally.

The government may also sell local debt to raise cash that can be used to buy dollars in the foreign-exchange market and help stem the real’s rally, Treasury Secretary Arno Augustin said Jan. 13.

Proceeds from the bond sales would be turned over to the government’s sovereign-wealth fund, adding to its 16.2 billion real ($9.2 billion) of assets so that it can buy more dollars, Augustin said. President Luiz Inacio Lula da Silva last month authorized the fund to purchase dollars to create another government-related buyer of U.S. currency in addition to the central bank.