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Posted on April 6, 2011
Brazilian Finance Minister Guido Mantega said he has an “array” of tools to stem local currency gains that are hurting domestic producers, after announcing yesterday his third attempt in two weeks to stem the rally in the real.
From today, banks and companies will have to pay a 6 percent tax on foreign loans with maturities of up to two years, Mantega told reporters yesterday. Since March 29, the government has changed rules on taxes paid on foreign loans three times. Banks and companies were previously exempt from the tax on loans maturing after 90 days.
President Dilma Rousseff has faced increasing pressure from manufacturers to curb currency gains to help them compete against a flood of cheaper imports from China, whose currency is pegged to the dollar. The move fell short of what traders had expected and is unlikely to prevent the real from strengthening, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc.
“It’s a huge letdown, the market was expecting more forceful measures,” Tuesta said. “Traders were worried that they would do something as extreme as a quarantine.”
The real could strengthen to below 1.60 per dollar today, Tuesta said.
In trading yesterday, the real erased earlier gains, falling 0.3 percent to 1.6144 per dollar from 1.6096 on April 5. The currency earlier rose to 1.6012, the strongest intraday level since August 2008.
Mantega said the currency’s strength was, to some extent, “inevitable” due to the economy’s strength. This may show the government acknowledging that there is a limit to what it can do to curb the real’s appreciation, Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a report.
“It sounds like an acknowledgment the authorities may try soothing BRL appreciation, but they can’t curb it, regardless of menaces of additional measures,” Santos wrote in a report entitled “Givin’ up.”
Mantega said he still has an “array” of measures that could be deployed to curb gains by the real, which has rallied 38 percent against the U.S. dollar over the past two years.
“All the measures we’ve taken have produced results,” Mantega said, adding that the real could have strengthened to as high as 1.50 per U.S. dollar in the absence of the currency curbs. “If we hadn’t acted, then certainly the real would be much more highly valued than it is now.”
Brazil is stepping up its efforts to fight capital inflows driven by the highest inflation-adjusted interest rates in the Group of 20 nations and near-zero borrowing costs in the U.S. and Europe. Economic growth that last year reached 7.5 percent, the fastest in over two decades, is also lifting the currency.
“The measure is likely to be ineffective to discourage capital inflows and avoid a further appreciation of the Brazilian real,” said Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc., in an e-mailed report.
After Mantega’s office said that he would announce new measures yesterday, the real erased earlier to decline on the day. The country’s benchmark Bovespa stock index fell 1.2 percent to 69036.91, snapping a six-session rally.
Mantega kicked off what he called Brazil’s response to the global currency war In October by tripling to 6 percent a tax on foreigners’ purchase of fixed-income assets.
Pressure has been mounting on Rousseff to take additional steps as manufacturers complain about a flood of cheaper imports from China.
Rousseff travels to China next week for a state visit and to attend a summit of leaders from Brazil, Russia, India and China, the so-called BRIC nations.
Brazil’s 11.75 percent benchmark interest rate compares with 8 percent in Russia and 6.25 percent in Turkey.
Brazil is expected to raise its so-called Selic rate to 12.25 percent by year end to fight inflation expected to reach 6.02 percent, according to the median estimates in an April 1 central bank survey of economists. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.
Brazil’s economy is expected to attract a record $55 billion in foreign direct investment this year, according to central bank estimates.
Developing economies will expand 6.5 percent this year compared with 2.5 percent growth in developed economies, according to an International Monetary Fund forecast published in January.
Brazil’s economy will grow 4 percent this year, according to the median estimate in a central bank survey of economists.
To contact the reporters on this story: Matthew Bristow in Brasilia at firstname.lastname@example.org Andre Soliani in Brasilia at email@example.com
To contact the editor responsible for this story: Joshua Goodman at firstname.lastname@example.org