Brazil Cuts Taxes to Stimulate Long-Term Corporate Debt Market

Brazil will cut taxes and provide incentives to stimulate the domestic corporate debt market and supply longer-term credit for infrastructure investments needed to host the 2014 World Cup and 2016 Olympics.

As part of the measures announced yesterday by Finance Minister Guido Mantega, the state-run development bank known as BNDES will set aside 10 billion reais ($5.8 billion) to purchase longer-term debt issued by corporate borrowers, helping provide liquidity to the secondary market for the paper.

Individual and foreign investors purchasing bonds with maturities of at least four years and linked to infrastructure projects will be exempted from paying taxes on their earnings, Mantega said. Institutional buyers will see their tax rates reduced to 15 percent from as high as 34 percent currently.

The new rules should boost local debt issuances to 70 billion reais per year, BNDES President Luciano Coutinho told reporters in Brasilia. This year, companies raised 41 billion reais, according to the Brazilian capital markets association known as Anbima.

“Long-term credit was always scarce in the country, but in the past it didn’t matter because there were so few investment projects,” Mantega told reporters yesterday in Brasilia. “Today there are projects that demand financing for 20, 25 or 30 years.”

Latin America’s biggest economy is ramping up spending on infrastructure as it prepares to host the World Cup and Olympics as well as develop the biggest oil discovery in the Americas since 1976. The government plans to oversee 955 billion reais in investment over the next four years.

Relieving BNDES

Mantega, who will continue as finance chief when President- elect Dilma Rousseff takes office Jan. 1, said the measures will ease the burden on BNDES, the country’s main source of long-term credit.

Since 2007, the Rio de Janeiro-based bank has doubled lending to 137.4 billion reais in 2009. The bank will now be allowed to sell so-called letras financeiras to raise capital from private investors instead of relying on funding from Brazil’s Treasury.

“We want to enter a new phase where the private sector can provide financing and share the work with BNDES,” Mantega said.

Reserves, Private Equity

The government will create a privately-managed fund using about 2.2 billion reais in bank reserves to provide liquidity to the secondary market for the domestically-issued bonds, said Nelson Barbosa, the secretary of economic policy. Short-term buying and selling of the paper will no longer be levied a transaction tax.

“We want banks to buy and sell debentures frequently,” Coutinho said.

A tax on foreign capital inflows that was tripled this year will be reduced to its previous 2 percent for foreign-based private equity investors who want to finance Brazil’s infrastructure drive.

Brazil raised the so-called IOF tax in October in a bid to take pressure off its currency, which has strengthened 35 percent against the U.S. dollar since the start of 2009, the second-biggest gain among 25 emerging market currencies tracked by Bloomberg after South Africa’s rand.

Lagging the BRICs

Local debt issuance by Brazilian companies is lagging behind Russia’s $27 billion and China’s $163 billion this year. Only India, at $18 billion, has had less corporate debt issuance among the biggest developing economies, or BRICs.

Central bank President Henrique Meirelles said yesterday in Sao Paulo that the new measures are “step in the right direction” in Brazil’s bid to stimulate longer-term credit.

Since President Luiz Inacio Lula da Silva took office in 2003, Brazil’s benchmark interest rate has fallen by more than half though still remains, at 10.75 percent, the highest in the Group of 20 nations. BNDES finance companies at a subsidized rate the currently stands at 6 percent.

It’s too early to say whether the new rules will achieve their intended effect, said Jankiel Santos, chief economist at Espirito Santo Investment Bank.

“Since you’d have more liquidity in the secondary market, people are going to start thinking about using more and more the capital markets rather than just going to banks to fund themselves,” he said in a phone interview from Sao Paulo.