Worried with Weak Dollar and Cheap Imports Brazil Considers New Regulations

US dollar The Brazilian government does not rule out new steps to slow gains in its currency, the real, even as the government evaluates the impact of a recently imposed tax on capital inflows, Secretary of Economic Policy Nelson Barbosa said in an interview on Monday, November 23.

Barbosa said additional measures would be more prudent in nature such as regulatory steps being discussed among the Group of 20 nations like capital requirements rather than new taxes.

His comments underscore the Brazilian administration's growing unease with the currency appreciation, which threatens to slow a nascent economic recovery by discouraging exports and flooding the country with cheap imports.

Among possible measures, the government may allow foreign investors to place guarantees for derivative operations abroad and will test the waters by doing this gradually, Barbosa told Reuters.

"The deposit of guarantees abroad is something that we are considering, it tends to ease the need for dollar inflows," Barbosa said.

He said there were no plans to exempt initial public offerings from a capital inflows tax in the short-term. In October, the government began charging a 2 percent tax on capital inflows into stock and fixed-income markets.

"This type of measure which we adopted, it's always good for you to have some time to see all of its effects," Barbosa added.

The real advanced for the first day in four on Monday, gaining slightly to 1.729 Real to the dollar. The implementation of the so-called entry tax in October helped slow gains in the real – the best performing currency among the most widely traded around the world this year.

Still, most analysts say the tax will be widely ineffective in the long run in containing a 35% rally in Brazil's currency this year.

Latin America's largest economy was among the first to come out of the crisis and emerged from a recession in the second quarter of this year. Asked whether the government would use the sovereign wealth fund to buy dollars, Barbosa said "there is still no decision for this to be implemented in the short term."

The idea is the government could use the fund to help drain excess dollars in the market by selling local government debt. But current conditions may not be suitable for the issuance of new debt to help the government buy the US currency.

"The Treasury still considers that long-term rates are not favorable for the issuance of longer-termed debt," Barbosa added.

Mercopress

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