By Andre Soliani and Camila Fontana
Oct. 20 (Bloomberg) -- Brazil’s “desperate” measure to tax foreigners’ investments in the nation’s equities and bonds is unlikely to succeed in stemming the currency’s world-beating rally, a former central banker said.
The government announced yesterday it will impose a 2 percent tax on foreign purchases of fixed-income securities and stocks starting today. The levy is higher than a previous 1.5 percent tax scrapped a year ago amid the worldwide credit crunch and one that didn’t cover equities.
Finance Minister Guido Mantega said yesterday the measure seeks to curb gains in the real, which has strengthened the most of any major currency this year on the back of higher commodity prices, a credit rating upgrade from Moody’s Investors Service and forecasts for faster economic growth. A stronger currency makes the country’s exports more expensive in dollar terms, hurting companies that rely on making sales abroad.
“It’s a desperate move,” said Paulo Vieira da Cunha, the director for international affairs at Brazil’s central bank from April 2006 to January 2008 and now a partner at asset management firm Tandem Global Partners LLC in New York. “This kind of measure does not alter the exchange rate trend” because investors will figure out ways to bypass the tax, he said.
Mantega said the move will slow the real’s appreciation by curbing dollar inflows from speculative investment and prevent the creation of bubbles in Brazilian markets. Mantega said that while the levy will dissuade investors seeking short-term gains, it won’t deter investors seeking long-term returns.
“These are to prevent excesses,” he told reporters.
Currency Outlook
While the tax may help keep the real at about 1.7 per U.S. dollar in the next few months, it won’t be able to deter the currency’s appreciation in the long term as investors create new strategies to buy Brazilian assets from abroad to bypass the levy, said Antonio Madeira, an economist at MCM Consultores Associados Ltd.
“These kinds of taxes provide some room for maneuver, but it’s not very much,” Nicolas Eyzaguirre, the International Monetary Fund’s Director for the Western Hemisphere, said by e- mail. “With today’s financial engineering, it’s not very difficult to disguise pure financial flows as trade flows or even foreign direct investment. In fact, the experience in a number of countries is that, over time, the system becomes rather porous.”
Still Bullish
Nick Chamie, head of emerging markets research at RBC Capital Markets, said he remains “bullish” on the real in the “medium term” even after cutting the currency to “underweight” from “overweight.”
“There are very good prospects for growth in Brazil, it is going to be a major destination for foreign direct investment,” Chamie said. “We downgraded it tactically. On a short-term basis, it will underperform emerging-market currencies.”
He expects the real to strengthen to 1.65 per U.S. dollar by December 2010. The currency weakened 0.5 percent to 1.7177 yesterday, and has gained 35 percent this year.
The new tax will make it more expensive for Brazilian companies to raise financing because investors will demand a steeper yield to compensate for the additional cost, said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York.
“It makes life more expensive for everyone,” he said.
Debt Costs
Latin America’s biggest economy has rebounded from its first recession since 2003, powered by local demand. Industrial production expanded in the past eight months, companies resumed hiring and retail sales have returned to pre-crisis levels.
Gross domestic product, after contracting in the last quarter of 2008 and first quarter this year, expanded 1.9 percent in the April-to-June period from the previous quarter, beating analysts’ forecasts for a 1.7 percent rise. Mantega has said the economy can grow 5 percent next year.
The tax on bonds will also force the government to pay higher yields on its debt emissions, said Zeina Latif, chief economist at ING Bank NV in Sao Paulo.
“It seems the upper end of the rate-futures curve reacted a bit to rumors on the tax,” Latif said.
The yield gap between Brazil’s real-denominated bonds maturing in January 2010 and July 2011 has widened to 2.66 percentage points from 1.87 points in July, according to data compiled by Bloomberg.
A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.
‘Alert Investors’
The currency is gaining even as the central bank buys dollars daily in a bid to stem the advance, a program that began May 8. Brazilian central bank President Henrique Meirelles said in an interview last week that emerging-market currencies that have been appreciating as economies recover from a global recession may become volatile as markets overprice assets.
Central banks need to “alert investors and markets of the risks of exaggeration in the formation of prices, which can lead to future corrections and create unnecessary volatility,” Meirelles said in the interview in New York.
The Brazilian stock market had more than 17 billion reais of net inflows from international investors this year through September, according to the Web site of BM&FBovespa SA, owner of the nation’s stock exchange. The benchmark Bovespa index has surged 79 percent in 2009 and closed yesterday at the highest level in 16 months.
“This tax has come and gone and been raised and lowered in the past without any real measurable effect,” Kenneth Fisher, who manages about $28 billion as chief executive officer of Fisher Investments Inc. in Woodside, California, wrote in an e- mail. “It is a negative but not a huge one.”
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Camila Fontana Correa in Sao Paulo at cfontana@bloomberg.net.
Posts
No comments:
Post a Comment