Political Risk Latin America Blog @PolRiskLatam

Brazil economy: More controls on capital?

Posted in News and Articles, Political Risk by politicalrisklatam on October 26, 2010

by The Economist Intelligence Unit, October 25th, 2010.

Brazilian policymakers have stepped up their efforts to curb currency appreciation brought about by a surge in capital inflows to emerging markets. But signs suggest that the inflows will continue and that any impact of the latest measures on the Real may be only temporary. And with the US Federal Reserve ready to embark on a new round of quantitative easing—which will boost the supply of liquidity and hence investment flows to attractive emerging markets—Brazilian authorities could well impose additional controls after the presidential election of October 31st is past. 

Since the Real broke the psychologically important R1.7:US$1 barrier on September 30th, the Banco Central do Brasil (BCB, the Central Bank) has intervened in the spot market, while the government twice has raised taxes on foreign investments in fixed-income securities. In addition, the finance minister, Guido Mantega, has been urging global policymakers ahead of the G-20 meeting in Seoul in November to adopt a more co-ordinated response to prevent a global currency war. 

Most recently, the government raised the Imposto sobre Operações Financeiras (IOF, financial transactions tax) tax on foreign fixed-income investments to 6% after markets closed on October 18th, after having raised it to 4% two weeks earlier (it had been levied at 2% since October 2009). The Real has weakened by around 1.7% since the second tax hike, and traded at around Rs1.70:US$1 on October 25th. The compares with a rate of R1.65:US$1 on October 13th. (continue reading… )

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