IMF Official: Brazil Should Phase Out Fiscal Stimulus - WSJ.com

IMF Official: Brazil Should Phase Out Fiscal Stimulus - WSJ.com: "
OCTOBER 23, 2009, 3:20 P.M. ET

SAO PAULO (Dow Jones)-- The best way for Brazil to protect its currency from additional, and unwanted, appreciation is to phase out fiscal stimulus measures, a top International Monetary Fund official said Friday.

'Given that Brazil has already emerged from the global crisis and is growing strongly, it is now time to remove fiscal stimulus,' IMF Western Hemisphere Director Nicolas Eyzaguirre told reporters. 'If not, Brazil will face inflation and rising interest rates.'

Higher interest rates, in turn, could bring in more speculative investment from overseas, leading to persistent appreciation of the Brazilian real.

The Brazilian real has gained 35% against the U.S. dollar so far this year. The strong real has hurt exporters. It has also led to a deterioration of trade and current account balances.

Earlier Friday, the Brazilian Central Bank released September current account figures, showing a monthly deficit of $2.31 billion, up sharply from $822 million in August. Brazil's September trade surplus dwindled to $1.33 billion from $3.1 billion the previous month.

Earlier this week, the Brazilian government slapped a 2% tax on incoming foreign investments in the areas of fixed-income and stocks. The frank purpose of the measure was to reduce foreign investment inflows to halt the appreciation of the real.

Eyzaguirre said, 'We understand perfectly how a country would wish to protect itself in a situation like this. The obvious thing to do is to open your umbrella when it's raining dollars.'

But Eyzaguirre said the increased taxation alone might not be enough to halt the real's appreciation. For that reason, he recommended removal of fiscal stimulus measures.

'Brazil has created a middle class, which has stepped up consumption to the point where fiscal stimulus is no longer necessary and can be phased out,' Eyzaguirre said.

-By Tom Murphy, Dow Jones Newswires; 55-11-2847-4519; brazil@dowjones.com"