Brazil minister voices currency concerns

Brazil’s finance minister has sparked speculation the government will introduce further capital controls after he said foreign exchange markets were giving the Brazilian real an “exaggerated” valuation.

Brazil last monthintroduced a 2 per cent tax on foreign portfolio investments to stem the appreciation of the real, which has appreciated by more than a third against the US dollar this year – and to reduce volatility in exchange rates.

Neither objective has been met. As well as being back to its pre-tax high, the real has gone through sharp swings over the past three weeks. It on Tuesday had returned to the R$1.70 to the dollar level before the tax was introduced on October 20, though Guido Mantega’s comments caused the real to fall to almost R$1.72 by the afternoon. They came amid official efforts to stem the appreciation of another outperforming Bric (Brazil, Russia, India and China) currency, the rouble. Russia’s central bank bought $700m and sold the rouble in a bid to slow the rise of the currency.

Mr Mantega’s comments also sparked renewed speculation that the government was preparing additional measures to slow the rise of the real, such as raising the level of the tax. Many analysts warned when the tax was introduced that modern financial engineering would quickly find ways round it.

Nathan Blanche, a specialist in foreign exchange at Tendências, a consultancy in São Paulo, said: “The tax is a palliative measure that doesn’t work. It is like putting on a plaster on the way to hospital. When you get there, you need surgery.”

But Mr Blanche said any attempt to strengthen the tax would add to incentives to sidestep it. He said it was more likely the government would introduce tax breaks for exporters, reducing the amount of money they bring into the country.

“Brazil exports more taxes than any other country in the world,” he said.

Sergei Shvetsov, head of the Russian central bank’s open market operations, said the rouble would not always move in one direction. “I’m sure the level of [rouble] volatility will remain the same as with other [currency] pairs and I would not take a risk to predict that the rouble will continue to strengthen.”

Mr Blanche said the only way to address the currency’s strength in the longer term was to deal with Brazil’s fiscal imbalances, reducing government spending and therefore taxation.