The Brazilian finance ministry has recently decided to increase taxation on foreign investments in the stock market and fixed capital by 2 percent in order to curb the sharp rise of the national currency real against the U.S. dollar.
Finance Minister Guido Mantega explained that the increase of Financial Transactions Tax had been adopted to avoid a "bubble" in the Brazilian stock market and real's overvaluation, which could "cause damage to domestic production."
The government had adopted such a measure at the beginning of last year, but decided to withdraw it in September 2008 in order to attract
foreign investment to offset the impact of the international financial crisis.
Investment in Brazil is attractive to foreigners also because the country's interest rate of 8.75 percent is high.
As a result of the strong inflow of foreign capital, the dollar/real exchange rate fell from 2.23 to 1.71 during the past six months. The real
has appreciated 31.44 percent against the U.S. dollar this year.
Brazil's currency recorded an appreciation of 0.95 percent in October and a cumulative appreciation of 24.67 percent in 2009. Since Oct. 30, 2008, the real has accumulated a gain of 16.62 percent.
The real cannot appreciate too much because this would increase imports to Brazil and weaken Brazil's productive activity, the minister said, adding that it would take a certain period of time for adopted measures to take effect.
However, Brazil's Central Bank analyst Newton Marques said the taxation was not the best measure to slow foreign investment.
"It is a measure of impact to prevent the overvaluation of the Brazilian currency, but it is insufficient because a larger quantity of
input is through Foreign Direct Investment (FDI)," he explained.
The tax imposed by the Brazilian government on Oct. 20 does not include the FDI.
Mantega said he was aware that the measures adopted might not avoid some appreciation of the Brazilian currency and stressed that the risk was
the overvaluation of the currency.
"I believe that [measures] will not prevent the appreciation of real because it reflects the strength of the economy," he said. "And Brazil is a strong economy. Therefore, the currency is strong."
President Luiz Inacio Lula da Silva said it was necessary to find a balance for the dollar exchange rate in Brazil, which means that real should not be highly valued nor too devalued.
"In seven years of government, I had the following experience: an importer enters my room wishing the dollar was as cheap as possible. The
importer leaves and the exporter enters, who wants the dollar to be as high as possible," he said. "What is the government's role? To establish a
balance."
Lula said measures must be taken so that the country would not be at the mercy of financial speculation.