São Paulo – The Brazilian Ministry of Finance’s decision of raising the Tax on Financial Operations (IOF, in the Portuguese acronym) from 2% to 4% for foreign investment in fixed income should not lead to a decline in this type of operation in Brazil. A sign that the measure will not cause capital inflows to drop was seen this Tuesday (5th), as the dollar continued to depreciate in the Brazilian market. On Monday (4th), the United States currency was worth 1.691 Brazilian real and as of 01:12 pm this Tuesday it was worth 1.677 real.
The minister of Finance, Guido Mantega, has decided to raise the IOF in order to prevent an increase in dollar inflow, which would cause the United States currency to depreciate against the Brazilian real and may harm Brazilian exports. The fixed income manager of brokerage firm Coinvalores, Paulo Celso Nepomuceno, explains that interest rates, however, are now very low in other parts of the world, such as the United States, therefore fixed income investment in Brazil is profitable for foreigners even with the raised IOF.
The government’s aim was to inhibit carry-trade operations, by which investors obtain funds in a low-interest market, such as United States or Japan, for instance, and invest it in Brazil, where interest rates are considerably higher. In Brazil, the annual interest rate is now 10.75%, whereas in the United States it is 0.25%. This Tuesday, Japan announced that it has reduced its interest rate from 0.1% to zero. It had been at 0.1% since 2008. The average interest rate in developed countries is 0.5%, highlights secretary general of the Arab Brazilian Chamber of Commerce, Michel Alaby.
Coupled with the fact that some risk rating agencies are signalling that they should increase Brazil’s rating again in the first half of 2011, dollars should not stop entering the country’s market anytime soon. Coinvalores’ fixed income manager explains that some investors need to invest in markets with certain ratings, therefore Brazil’s improved status should increase the number of possible investment operations in the country.
In fixed income operations, foreigners invest in the country federal public bonds. Arab investors do this type of investment in Brazil regularly, says Michel Alaby. According to him, however, the increased tax should not lead to a decline in investment in the country’s fixed income market by foreign investors, Arab or otherwise. Even if the IOF did inhibit foreign investment, it would have no major impact on the Brazilian market in the short term. “Direct investment is able to sustain the balance of payments,” Nepomuceno explains.
*Translated by Gabriel Pomerancblum
