In March, the government tightened capital inflow controls by introducing the 6% IOF tax (IOF) on foreign loans granted to exporters. This means that loans under advance payment agreement will only be exempt from IOF tax if they have a duration of less than 360 days and if they are provided by importers i.e. not by a bank or a trading company. Moreover, the government extended from two to three years the minimum maturity requirement for exemption for the 6% IOF tax on external borrowing by residents (loans and bond issuance). Later, it broadened to IOF tax on foreign borrowing to cover any debt with a maturity of up to five years. The tax on capital inflows was introduced in 2009 and increased in 2010. In addition, the central bank intervenes in the spot and derivatives market and has imposed other measures such as non-remunerated reserves requirement on foreign exchange positions. All these measures aimed to stem currency appreciation in order to protect the manufacturing sector by deterring capital inflows into the country.

Impact on country risk

The share of manufactured goods in goods exports has decreased sharply in a decade from nearly 60% to almost 20% even if manufactured exports have increased in absolute value. The “currency war” rhetoric of the government has to be put in this context of growing concern over deindustrialisation and slumping economic growth. As a consequence, stemming currency appreciation is on the top of the government’s priority list in addition to other protectionist measures such as higher taxes on foreign or imported cars. All in all, further controls on capital inflows and trade barriers are likely to be adopted. Nevertheless, even if  these measures have any effect on the exchange rate in the short term, they are unlikely to contain currency appreciation in the medium term as it reflects the growing importance of the Brazilian economy.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com