It’s a record. Brazil registered its second-largest volume of net monthly foreign-exchange inflows on record in July. Net dollar inflows in the month reached 15.83 billion, compared with 2.56 billion in net outflows in June and only 713 million in net inflows in July last year.
The central bank reported Wednesday investment inflows of 9.57 billion in July, while trade-related dollar inflows totaled 6.25 billion.
The biggest one-day movement in the month came on July 11, when the net flow from financial transactions amounted to a surplus of 6.67 billion, almost three times the next-biggest one-day movement in the month.
The surge into the Super Real from the dollar on that day came after the central bank said on the evening of July 8 that banks would have to deposit 60% of the value of their short-dollar positions above 1 billion dollars without any remuneration.
“The central bank imposed a measure that forced banks to reduce their positions rapidly,” said Alfredo Barbutti, an economist at Liquidez Brokerage in São Paulo. “That was on a Friday, and on the following Monday the banks acted.”
At the end of the month, Brazil made further policy moves to discourage foreign-investor inflows by anticipating a tax of up to 25% on local short-dollar positions.
With the latest July figures, Brazil has posted year-to-date net dollar inflows of 55.67 billion dollars, well above the 24.4 billion posted in all of 2010.
In addition to the incoming dollar flows in July, Brazil’s central bank on Wednesday reported it purchased 6.6 billion in spot-market currency auctions in July to build its foreign reserves.
Brazil’s reserves stand at 347.6 billion dollars. The recent debate in the US to extend the debt ceiling revealed that Brazil is the fifth holder of US debt.
The Super Real has gained almost 50% against the dollar over the last three years, and the government of President Dilma Rousseff on Tuesday unveiled a batch of measures, equivalent to 16 billion dollars, to help industries cope with the appreciation.
“The currency isn’t going to change in the short term, we will have a strong currency for a long period of time, Brazil has moved into the group of countries with a strong currency and with balanced fiscal accounts” Minister Pimentel told foreign correspondents in São Paulo. “Businessmen will have to get used to that.”
To contain the effects of the Super Real on Brazil’s beleaguered manufacturers the government announced temporary tax cuts for select sectors increased lending for industry and a government purchasing program that will favor Brazilian products over less-expensive imports.
Pimentel said that recent data for industrial production had been “very bad” and had caused deep concern in the government.
Pimentel rejected accusations that the plan to favor local products in government purchases was a protectionist move, and said neighboring countries that are considered full members of the Mercosur free trade pact–Argentina, Paraguay and Uruguay–will also benefit. The government will pay up to 25% more for local goods which contain 40% local content from Brazil and any Mercosur country.
“The criticism of protectionism is a very easy criticism to make and can be leveled at any measure,” Pimentel said. “We’re implementing, with many years of delay, the Buy America Act. That isn’t protectionism”.
The Buy America Act was signed into law in the U.S. by President Franklin Roosevelt in 1933.
“Protectionism would be if we prohibited imports. For example, we aren’t going to prohibit car imports, but we are going to encourage those that produce locally,” Pimentel said.
Propping the Super Real
A package of tax breaks and incentives unveiled Tuesday by Brazilian president Dilma Rousseff represent a good start to help local companies overcome competitive challenges presented by adverse local and global economic factors, but still fall short of what’s needed, Brazilian industrial leaders said.
Speaking on the sidelines of the government’s announcement, leading local industrial-sector officials said they would continue to push for more actions to overcome the effects of local competitive hurdles and the strong local currency, Super Real.
“These measures are a good start” said São Paulo Industrial Federation President Paulo Skaf. “But they’re still far from resolving the problem of competitiveness that’s been robbed by the strength of the currency, problems with local infrastructure, and the lack of approval of economic structural reforms”.
Brazil’s government on Tuesday unveiled a broad range of measures under then ambitious heading of “Bigger Brazil” to help manufacturers cope with adverse competitive conditions, including some 25 billion Brazilian reais (approximately 16 billion dollars) of tax incentives over the coming two years, as well as some specific measures to aide labor-intensive industries including textiles, footwear, software and vehicles.
Skaf said he believed the government needed to also extend measures to other sectors to further bolster the local economy.
“Time will show a need to augment these measures and extend them to other sectors because all industrial sectors deserve attention and incentives” he said.
In addition to short-term tax incentives, Brazil’s industry has long clamored for an overhaul of the country’s tax system and a reduction of local interest rates to make local products more competitive and diminish a flood of overseas capital that in recent years has bid up the local currency.
Still, other industrial leaders present at the announcement said the sector would have to accept what was possible in the short term to buffer against dramatic recent losses in competitiveness.
“My dream would be to have a strong dollar and low local interest rates, but these things will have to be resolved over time,” said Robson Andrade, president of the National Confederation of Industries, or CNI. “In the meantime, some local sectors are still thriving despite adversities, so we need to help those that are struggling.”
According to a CNI industrial survey released Monday, nearly half of local export industries reduced or eliminated their export activities in 2010 due to the effects of a the Super Real and weak overseas markets. A further 24% said they believed they could lose further export sales in 2011.
Still, others present at the event Tuesday said that although longer term local reforms such as tax and pension reforms might be welcome, the country couldn’t afford to be trapped in the grip of inertia while local industries suffered.
“We can’t fail to take short-term measures while we are waiting to formulate structural reforms,” said Paulo Godoy, President of the Brazilian Infrastructure Industries Association, or Abdib. “We need to react to ever-growing overseas competition from countries such as China.”
Under the impact of heavy international liquidity, Brazil’s currency, the real, has strengthened more almost 50% against the dollar since early 2008. Local industries have complained that the strong real has sapped the attractiveness of Brazilian manufactured goods abroad and helped inundate the country with a flood of cheap imports, mainly from Asia and China.
On announcing the package President Dilma Rousseff said that today more than ever “it is imperative to protect Brazilian industry and our jobs from unfair competition and the currency war, which hurts our exports and, worse, affects our domestic market” with a flood of imports”.
Finance minister Guido Mantega who coined the “currencies war” expression pointed out that in a “predatory, competitive world stage” the package should help contain ‘the currency manipulation by larger economies’ that has hurt the Brazilian economy and exports.
Finally more specifically on the imports side, Industry and Foreign Trade Minister Fernando Pimentel said the plan calls for “zero tolerance for any kind of fraudulent importation, counterfeiting or piracy of origin” and emphasized that “we shall defend our local production, our domestic market”.
Brazil to request additional exceptions from Mercosur common external tariff
Brazil will request at least 100 additional exceptions from Mercosur common external tariff, TEC, as part of the program to prop local industry that was announced earlier this week and includes tax relief to the tune of 16 billion dollars.
Threat of Cheap Imports
Under Mercosur rules, Brazil is already allowed 100 exceptions to the common tariff (which averages 14%) from a list of 9000 goods regulated by the regional customs union.
Brazil and other Mercosur partners have complained strongly in recent years of imbalanced foreign trade brought by the effects of heavy global liquidity and a weak US dollar.
“The situation in all of Mercosur has been dramatic because of the entrance of cheap goods from abroad” said Trade and Industry minister Fernando Pimentel.
“The regional economy has been threatened by predatory competition that has taken hold around the globe,” Pimentel added. “Developed countries are those that have industry and we’re going to protect our own”.
Pimentel said that the government plans to offer additional incentives for other sectors not considered under the industrial competitiveness plan. Among the sectors mentioned are the semiconductor and telecommunications transmission. Another area refers to regulations for auto-sector tax breaks but linked to local technological development programs.
Tax breaks for industries described as strategic in the plan include the IPI industrial products tax, and PIS-Cofins welfare tax. Pimentel also confirmed that the equivalent of almost a billion dollars, annually, in controversial breaks on corporate social security contributions would be covered by the country’s treasury under the package.
“Buy Brazil Act” and Super Real are here to stay, says Minister
Brazil’s strong currency (the so-called Super Real) is here to stay, and businesses have to get used to this new environment, said Trade and Industry Minister Fernando Pimentel a day after the government announced a massive industry support program which was described is the equivalent of the US “Buy America Act”