Brazil decides to reverse recent measures targeting which loan maturities get its 6 percent IOF tax.
Perhaps its capital control measures were too successful. In March Brazil extended its 6 percent financial operations tax (IOF) on foreign loans maturing within five years from a previous three-year threshold. But having seen a big drop in inflows and weaker economic data, Brazil has decided to reverse the measures, lowering the maturity for foreign loans that are subject to IOF tax to two years from five years.
“This measure indicates to us that the government is likely concerned about the current depreciation of the BRL, which has been impacted by the higher risk aversion environment and the consequent drop in inflows,” wrote Citi in a note to clients. “In this regard, if the external outlook deteriorates further, in the case of an unfavorable outcome following the Greek elections, for example, other measures could likely be adopted, in our view, such as central bank intervention in the FX market.”
Brazil’s March moves (there were actually two increases in March) were seen not only as an attempt to weaken the country’s surging currency, the real, but also an effort to protect the local industrial economy as a whole. After first increasing the tenor on foreign loans not subject to the 6 percent IOF tax from two to three years on March 1, Brazil decided again to increase the tenor on March 12 to five years.
But lately Brazil has shown signs of a deepening slowdown. First quarter GDP came in weaker than expected and other April and May data have also been soft pointing to further slowing. According to Brown Brothers Harriman, “service PMI for May came in weak at 49.7 vs. 54.4 in April and comes after manufacturing PMI for May was reported steady at 49.3. This is the first time both have been below 50 since July 2009.”
Bottom line, BBH said, stimulus measures will continue.