by Win Thin
No big surprise from Brazil’s decision to boost the IOF tax again on fixed income foreign investment to 6% from 4% previously. Still, this is a pretty strong statement since it comes just two weeks after it was hiked to 4% from 2%. In addition, Brazil increased the tax on margin deposits on futures markets to 6% from 0.38% previously. Finance Minister Mantega hinted earlier today that more tax measures were being mulled, and so the government delivered pretty quickly. We continue to believe that the authorities will continue to tinker with its toolbox to find the right combination of policies to curb excessive BRL appreciation. The tax on margin deposits appears to be geared towards addressing speculative, leveraged bets on the currency. We await further details and clarification with regards to effective dates, etc.
Mantega said that there are other measures that can be taken, and that Brazil is trying to limit short-term investments. Given Brazil’s concerns about relying on potentially destabilizing hot money flows, we cannot rule out some sort of lock-up period for inflows if the current measures prove unable to limit the inflows (see our recent comment “Is Brazil Considering Encaje-Type Approach To BRL Strength?”) and so we warn that caution is still warranted in BRL at current levels near 1.65. But ironically, Brazil is very dependent on hot money to finance the current account gap as the basic balance of the past 12 months is a whopping -$18.6 bln. Finally, we stress that more and more countries are likely to follow Brazil down this road (see today’s comment “EM Capital Controls Event Risk Remains High And Rising”).
Win Thin | Global Head Of Emerging Markets Strategy