Brazil imposes tax rise to restrain the real

Brazil has launched a fresh assault in the battle to slow the appreciation of its currency and protect local manufacturers.

In an attempt to limit the amount of dollars flooding into the country and boosting the Brazilian real, the government said it would make companies in Brazil pay more tax on the money they raise abroad through loans or bond sales.

From Colombia to Thailand, many fast-growing economies have wrestled with the appreciation of their local currency. Although the weak US dollar is partly to blame, these countries have also been the victims of their own success, luring huge amounts of investment at a time when the developed world is still struggling to recover from the financial crisis.

However, Brazil has one of the most overvalued currencies in the world and has also been one of the most active in trying to do something about it through market interventions and tax changes. “It’s like a game of cat and mouse,” said Tony Volpon, emerging markets economist with Nomura Securities. “It’s a process of learning to see what works by doing it.”

Over the past two years, the real has risen almost 40 per cent, hitting companies such as steelmakers, which are finding it more difficult to sell their goods abroad and to compete with a deluge of cheap imports.

Even some hostels in the tourist destination of Rio de Janeiro are reporting falling numbers of foreign travellers, who can no longer afford to include Brazil on their South American itinerary.

According to a decree published on Tuesday in the government’s Official Gazette, local companies will now have to pay 6 per cent to the state rather than 5.38 per cent when they repatriate some funds raised abroad through loans or international bond sales. Crucially, more of that debt will now be taxable.

Loans or bonds with an average minimum maturity of up to one year have been declared eligible, whereas previously the tax only applied to debt of up to three months. However, these types of tax changes are unlikely to have a big effect, Mr Volpon says. “The foreign exchange market has paid little attention to these measures because what drives the real is essentially fundamentals and commodity prices.”

The tax adjustments underline a subtle shift in the focus of the government’s efforts to rein in the currency. Whereas past measures targeted “foreign speculators” and alluded to a global “currency war”, Dilma Rousseff, Brazil’s president, has taken a wider, more technical approach by introducing measures that will affect Brazilians as well as foreigners.

Analysts said the latest change could also be a way to suck up some of the liquidity sloshing around in Brazil’s banking system by making banks more reluctant to expand their balance sheets abroad.

In spite of raising banks’ reserve requirements in December, credit operations surged 21 per cent in the year to February, according to central bank data released on Tuesday, adding to fears over a potential credit bubble.