Brazil slaps surprise tax on stocks

Oct 23, 2009

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The Brazilian government has surprised the markets by imposing a 2% tax on foreign purchases of stocks and local currency bonds. The move follows a 36% rise in the Brazilian real against the dollar this year, which is "eating away" at Brazil's manufacturing base, said Hans Redeker of BNP Paribas. Both the real and stocks fell back on the news, with the Bovespa Index down 4%.

What the commentators said

Talk of a "wholesale retreat to capital controls" is misplaced, said Capital Economics. This step – which follows a temporary 1.5% tax on foreign bond investors last year – is a "pragmatic response" to a soaring currency and frothy stockmarket. Brazil is "a victim of its recent economic success", agreed Lex in the FT.

After a short recession, growth is expected to rebound to around 5% next year. Industrial production has grown for eight months and hiring is up. Throw in its exposure to rising commodity prices and relatively high interest rates, and it's no wonder "huge quantities of speculative money" – released by loose global monetary policy – have targeted Brazil this year, said Breakingviews.com's Martin Hutchinson.

However, the tax is not hard to avoid, said Nicolás Eyzaguirre of the IMF. "With today's financial engineering, it's not very difficult" to disguise investments in stocks and bonds as other types of capital inflow. "The system becomes rather porous."

In any case, the tax seems unlikely to cool the real as it won't "deter any but the shortest-term investors", said Jonathan Wheatley in the FT. As was the case last year, said John Authers in the FT, we'll probably have to wait for global maket sentiment to turn before the rise in emerging-market currencies comes to an end.

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