Brazil sparks wider currency control fears

Asian currencies came under pressure on Thursday as a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit.

Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

The government announced a 1.5 per cent tax on American Depositary Receipts. Guido Mantega, Brazil’s finance minister, said some foreign investors had been buying ADRs to get exposure to the local equity market while avoiding the tax.

With interest rates in major economies at record lows as their economies crawl out of recession, speculative investors have poured funds into faster-growing emerging markets in recent months in search of yield.

Those speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies.

However, Brazil and Taiwan have taken more dramatic action, imposing capital controls designed to limit the appreciation of their currencies.

Speculation has risen that other countries will follow their lead.

“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.

Indeed, the Indonesian rupiah dropped sharply after the country’s central bank said it was considering steps to limit inflows on Thursday.

Darmin Nasution, deputy governor of Bank Indonesia, said the central bank was “seriously” studying the option of limiting inflows into short-term government bonds.

The rupiah, which has risen more than 17 per cent against the dollar so far this year and is Asia’s best-performing currency, dropped 1.6 per cent to Rp9,525 against the dollar.

Meanwhile, the Indian rupee lost ground on reports that the government was planning set quotas on corporate foreign borrowing in a bid to stem the rupee’s advance.

Ashok Chawla, Indian finance secretary, played down any immediate threat from capital inflows, saying they were not currently a concern.

“As the situation evolves we will see what needs to be done,” he added.

The Indian rupee fell 0.9 per cent to Rs46.62 against the dollar.

Elsewhere, Taiwan, which earlier this month banned foreigners from putting money into time deposits in a bid to keep a lid on its currency’s gains, said some of the speculative money had already left the country.

Perng Fai-nan, Taiwan’s central bank governor, told parliament that of T$400bn ($12.4bn) parked in time deposits by foreign investors last month, T$50bn had already been pulled out.

“We hope the level of [speculative] money will fall further,” he said.

The Taiwan dollar eased 0.5 per cent to T$32.28 against the US dollar.

Other Asian currencies also lost ground, with the Korean won falling 0.4 per cent to Won1,158.15 against the dollar, the Malaysian ringgit dropping 0.8 per cent to M$3.3895 and the Philippine peso losing 1 per cent to 47.060 pesos.