Brazil to Keep Tax on Foreigners’ Bond Buys, Augustin Says

Brazil plans to maintain a tax on foreigners’ purchases of fixed income assets that was introduced to try to curb currency gains, Treasury Secretary Arno Augustin said.

The real extended losses after Augustin’s remarks, and after President Dilma Rousseff said Brazil has created conditions that will allow it to cut interest rates cautiously.

“It’s fine as it is,” Augustin said in an interview in Brasilia. “Foreign participation in our internal debt remains high. With the world in crisis, that’s not a small thing. There’s no capital flight.”

Today’s remarks by Augustin and Rousseff led traders to pare bets that the government may start to roll back measures designed to weaken the real, Amos Sanches, a currency trader at Sao Paulo-based Gradual Corretora de Titulos e Valores Mobiliarios Ltda, said in a telephone interview. In October, the government tripled to 6 percent the so-called IOF tax, as one of a series of measures to curb a rally in the real, which the government said was harming Brazilian industry.

The real has fallen 18 percent against the dollar since the end of July, the most among 16 major currencies tracked by Bloomberg after the South African rand, as a European debt crisis and the threat of a U.S. recession led investors to dump emerging market assets.

The real weakened 2.2 percent to 1.8815 per U.S. dollar at 3.46 p.m. New York time.
Buying Dollars

As well as increasing the IOF tax, Brazil introduced restrictions on foreign currency loans, limited short dollar positions and bought dollars in the spot and forward markets to try to limit the real’s appreciation.

The central bank surprised economists last month by cutting its benchmark interest rate half a point to 12 percent, citing the deterioration in the global outlook. The cut followed five straight rate increases this year. Inflation accelerated to 7.33 percent in the year through mid-September, its fastest pace in six years. The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points.

“We are opening a space so that the central bank facing the world crisis, including the threat of deflation and depression in some advanced economies, can start a cautious cycle of responsible reductions in interest rates,” Rousseff said at an event in Sao Paulo.

Augustin said that Brazil plans to sell more bonds abroad this year even if it has to pay a higher yield than in previous auctions.
Bond Sale

The Treasury hasn’t decided yet if it will offer dollar or real-denominated bonds in its next foreign auction, Augustin said. Brazil’s last foreign bond auction was on July 7, when it sold $550 million of its dollar bonds maturing in 2021 to yield 4.188 percent.

“The crisis hasn’t undermined the quality of Brazil’s economic fundamentals. There are days the market is more nervous, but Brazil’s fundamentals are stronger,” Augustin said. “We continue to work with the idea of a new offer this year, but the currency hasn’t been decided yet.”

The yield on the interest rate futures contract maturing in January 2012 fell 8 basis points, or 0.08 percentage point, to 11.100 percent at 3.35 p.m. New York time.