As Brazil’s currency continues to weaken, Brazil’s Finance Minister Guido Mantega announced in June that he is eliminating Brazil’s tax on foreign bond buyers and overseas investors. This is good news for foreign investors who will benefit from the change in financial policy.
In his announcement, Mantega stated that he is not worried about excess liquidity. He believes that the Brazilian market is more stable, so it is safe to remove the financial obstacle that he put in place several years ago. Mantega maintains that the move is not an attempt to boost the value of the Real or to influence the exchange rate to curb inflation.
Even after this action, the Real lost 7.6% of its value in the second quarter of 2013. That’s the worst performance among all seven major Latin American currencies. The Real continues to hover around its lowest point in four years. After tumbling to a low of R$1.94 against the Dollar on March 8th, it bounced back to R$2.33 on August 14th.
Brazil has reportedly taken this action due to the reduced liquidity of its currency. Mantega once justified the foreign investment tax as a means for Brazil to defend itself against a “currency war” he believed to be waged by developed nations that included the U.S.
He was referring to the 2008 financial crisis in the U.S. when the Federal Reserve decided to dump large amounts of cash into the market. This had the effect of weakening the Dollar against Brazil’s Real, but the U.S. maintained that a strong U.S. economy would spark recovery throughout the world.
According to Mantega, he eliminated the 6% tax on foreign portfolio investment, known as IOF, due to “changes in the global financial landscape” and his satisfaction with the positive flow of capital into emerging markets from investors. He also stated that Brazil is not facing a shortage of liquidity and that Brazilian companies will not have problems securing international financing.
The tax cut is part of Brazil’s ongoing effort to reduce the capital controls it put in place over the past few years to protect the value of the Real. For instance, back in April President Dilma Rousseff did away with a tax on loans that would be used to purchase, produce, and lease capital goods.
The elimination of the foreign investment tax applies only to fixed-income investments. However, derivatives continue to be taxed.