Brazil Broadens IOF Tax in Bid to Counter Inflows, Stem Currency’s Rally

Brazil yesterday announced it will extend a higher tax for the renewal of foreign loans with maturities of up a year after Finance Minister Guido Mantega said the country will continue to adopt measures seeking to reduce “excessive” dollar inflows.

Brazil last week increased to 6 percent the so-called IOF tax on new corporate loans and debt sales abroad by banks, which will now be applied to renewed, renegotiated, or transferred loans, the central bank said on its website. Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months.

Taxes on foreign investment in the financial markets of Latin America’s biggest economy failed to stop the country’s currency from rallying the most in more than 20 months last week. As the real strengthens toward 1.60 per dollar, the government may be running out of options, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc.

“There’s not much they can continue to close, unless they really want to reduce investment,” Tuesta said in a telephone interview. “It’s just closing a loophole — the market was already expecting something like that, because they knew there was a loophole there.”

The real surged 3.4 percent last week, the biggest weekly gain since the period ended July 17, 2009. Yesterday, the currency traded little changed at 1.6073 per dollar from 1.6070 on April 1, its strongest close since August 2008.

According to the central bank, $5.6 billion of debt maturing in up to 360 days was either renewed, renegotiated or transferred in January and February.

‘Inexorable’
Finance Minister Guido Mantega will discuss a new round of capital controls in meetings with government officials, including central bank President Alexandre Tombini, in coming days, said a ministry official briefed on the plan who asked not to be named because the talks aren’t public.

Mantega is seeking ways to reduce foreign capital from going into local markets without hurting infrastructure and industrial investments, the person said.

Interest rates close to zero in Europe, the U.S. and Japan have boosted demand for higher-yielding assets in emerging markets. Brazil’s 11.75 percent benchmark interest rate compares with 8 percent in Russia and 6.5 percent in Turkey.

“The appreciation is inexorable,” Raul Velloso, a former Planning Ministry secretary who advises lawmakers at Brasilia- based ARD Consultores Associados, said April 3 in a telephone interview. “There’s not much they can do other than buying dollars.”

Inflows
Brazil received net inflows of $10.5 billion from trade and financial investments March 1 to March 25, compared with $7.4 billion for all of February, according to the central bank. This year to date, inflows totaled $33.45 billion, compared with $24.35 billion for the whole of 2010.

The interest-rate futures contract maturing in January 2012, the most traded in Sao Paulo today, rose one basis point, or 0.01 percentage point, to 12.16 percent.

Brazil’s credit rating was raised one level yesterday by Fitch Ratings, which cited the economy’s growth prospects and budget cuts under President Dilma Rousseff.

The country’s foreign debt rating was increased to BBB, the second-lowest investment grade and in line with Mexico, Russia and Thailand, from BBB-. Standard & Poor’s and Moody’s Investors Service rate the country one step lower.

The possibility of new government measures to curb the currency rally was reported by O Estado de S. Paulo newspaper in its April 2 edition.

The measures may include an additional tax increase for the financial markets and restrictions on foreign capital, Estado said, citing an unnamed government official.

The government needs to curb spending to be able to bring down interest rates without stoking inflation, Velloso said.

Reducing overlays would allow the government to buy more dollars to build up reserves without having to increase debt, he said.