The price of success.
Attempts to dampen the impact of the falling US dollar have emerged in one of the world’s fastest growth emerging economies.
Brazil revealed yesterday that from today it will move to try and limit the attractiveness of the country’s currency, the real, to foreign investors by making it more expensive to buy some local assets and hold them.
The country’s Finance Ministry said that it will impose taxes on purchases by foreign investors of real-denominated, fixed-income securities and on purchases of shares.
The measures are being taken “to avoid an excess speculation in the stock market and in capital markets”, Finance Minister Guido Mantega was quoted as telling the media in Sao Paulo.
The move leaves foreign purchases of real estate and companies, and investment in things like mines, rural land and factories, exempt from the taxes.
The real has gained 35% since the start of 2009 as Brazil’s economic prospects have recovered faster than the US and Europe.
(The Australian dollar though is up by more than 40% from the start of the year, and around 47% from the lows in March of just over 63 US cents. It traded around 93 US cents yesterday and eased back under that level overnight).
Like Australia, Brazil is a major supplier of resources to China (iron ore in particular) and it is a huge producer of beef, soybeans, sugar and coffee (world coffee prices hit their highest level in a year overnight of just over $US1.40 a pound).
It is also emerging as the newest major global oil power with a series of offshore strikes (in deep and hostile ground) that could total over 50 billion barrels by some estimates, and more by others.
According to Bloomberg, the real is up more than 5% in the last month alone. The country’s sharemarket is up more than 70%.
But the move to impose this tax will make big international investors, who were early into Brazil, India and Chinese shares this year, nervous.
The tax will limit their ability to sell their holdings and exit: the only buyers will be locals who will try to drive prices down by the size of the tax.
In coming months the move could be positive for Australia which is facing similar growth prospects, but doesn’t tax foreign investment
Brazil’s central bank started purchasing dollars in early May in a bid to temper the real’s gains against the greenback.
The decision reverses last year’s move to end such taxes.
At the depths of the credit crisis a year ago, in October 2008, President Lula da Silva eliminated a tax, known locally as IOF, of 1.5% on foreign investments in certain financial products and of 0.38% on foreign-currency loans.
Foreign investors will now pay a 2% tax when they buy stocks or fixed-income securities.
The Finance Minister said the move was not aimed at weakening the real, but are designed to slow its appreciation and prevent the creation of bubbles in Brazilian markets.
“These (taxes) are to prevent excesses,” he was quoted by Bloomberg as saying.
GDP grew in the June quarter after the economy dipped into a classic two quarter recession from September 2008 to March this year.
And there’s growing concern in Europe about the impact the falling dollar is having on the euro and the tentative recovery.
European Central Bank President Jean Claude Trichet said yesterday that “We all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar".
The euro has risen by around 20% against the dollar since February (which tells us how far behind Australia and Brazil Europe is in its recovery).
“We reaffirm a shared interest with our partners of the major floating currencies that we have a solid and stable currency system,” Trichet said. “The eurogroup and the ECB will echo this position, which has been recently repeated by the American authorities."
The French government also said there was a need for a strong dollar.
