Brazil’s finance minister Guido Mantega, one of the most shrill critics of Western money-printing, has decided to repeal the so-called IOF tax, he imposed almost three years ago as a measure to fend off hot money flows.
Well, circumstances alter cases, Mantega might say. And the world is a very different place today compared to 2010. Back then, the Fed was cranking up its printing presses and the currency war (in Mantega’s words) was raging; today the U.S. central bank is indicating it may start tapering off the stimulus it has been delivering. Nor is investors enthusiasm for emerging markets what it used to be. Brazil’s currency, the real, is plumbing four-year lows against the dollar and local bond yields have risen 30 basis points since the start of May. Brazil’s balance of payments situation meanwhile, is deteriorating, which means it needs all the foreign capital it can get, hot money or otherwise. And currency weakness spells inflation — bad news for Brazil’s government which faces voters next year.
The IOF did work — Brazil’s local debt markets received just over $10 billion last year, Bank of America/Merrill Lynch calculates — a third of 2010 levels, and much of the cash that was already invested, preferred to stay put (given the IOF is paid upon exiting the country).
So will Mantega’s latest gambit work? So far, the real’s reaction has been muted and some analysts even reckon on short-term losses as funds that were staying in to avoid paying the 6 percent levy, are now free to leave.
Analysts at BofA/ML estimate a 2 percent currency benefit versus the dollar as well as a bond rally as real yields for foreigners will now be higher. Brazilian global bonds (denominated in reais but listed and traded overseas) however could lose out — these enjoyed a surge in demand as investors tried to get exposure to the currency without paying the IOF. BofA-ML reckon yields here could rise as much as 150 bps.