Brazil to Impose Tax on Foreign Inflows, Mantega Says (Update3) - Bloomberg.com

Brazil to Impose Tax on Foreign Inflows, Mantega Says (Update3) - Bloomberg.com

By Adriana Brasileiro and Andre Soliani

Oct. 19 (Bloomberg) -- Brazil will impose taxes on purchases by foreign investors of real-denominated, fixed-income securities and on purchases of stocks, Finance Minister Guido Mantega said.

The measures are being taken “to avoid an excess speculation in the stock market and in capital markets,” Mantega told reporters in Sao Paulo.

The real has gained 35 percent since the beginning of the year, the best performer amid the 16 most traded currencies tracked by Bloomberg. The currency has gained 5.3 percent in the past month.

The central bank started purchasing dollars on May 8 in a bid to temper the real gains. The currency weakened 0.5 percent to 1.7177 per U.S. dollar at 4:28 p.m. New York time.

Earlier today, the Brazilian real was cut to “underweight” from “overweight” in RBC Capital Markets’ model portfolio on concern the government would impose new taxes.

Today’s announcement reverses last year’s decision to end such taxes. In October 2008, President Luiz Inacio Lula da Silva eliminated a tax, known locally as IOF, of 1.5 percent on foreign investments in certain financial products and of 0.38 percent on foreign-currency loans.

“Excess global liquidity could lead to an over-appreciation of the real,” Mantega said. That would threaten to hurt the country’s exporters and further fuel demand for imports.

Foreign investor will pay a 2 percent tax when they enter the country to buy stocks or fixed-income securities.

In the short term, the measure may help keep the real above 1.7 per U.S. dollar, said Antonio Madeira, chief economist at MCM Consultores Associados Ltd. As the market creates new investment strategies to bypass the tax, the impact in the currency market will be lost, he said.

Mantega said the measures may not lead the real to weaken, but are designed to slow its appreciation and prevent the creation of bubbles in Brazilian markets. “These are to prevent excesses,” he said." ....