MercoPress. South Atlantic News Agency

Brazilian package to boost exports and prop the ailing dollar

Finance Minister Guido Mantega

Brazil levied a new tax on foreign capital and announced tax breaks for exporters Wednesday in an effort to slow the Brazilian Real's gains against the US dollar which has appreciated 62% against the greenback in three years.

Finance Minister Guido Mantega said the measures were prompted by the "melting" of the dollar, which recently fell to 1.68 Real, a nine-year low. To reduce the inflow of dollars, Brazil will levy a 1.5% tax on purchases of Real- denominated, fixed-income securities by non-residents including treasury bonds. "We're punishing short-term investments. ... We hope to reduce the flow of short-term capital." But starting Monday, Brazil also will eliminate a 0.38% tax on foreign exchange operations for exports. The government currently collects about 1.3 billion US dollars a year from the tax, and its elimination is will make exports cheaper, Mantega said. The government also will let exporters keep foreign income overseas, he added. Mantega said Brazil does not expect the dollar to rebound suddenly, but intends the new measures to "signal a new direction". He added that "we prefer gradual measures, necessary to reach the goal; we think these are adequate, but if necessary, we will take others" However demand for Brazilian debt had slowed after the central bank said it considered raising the benchmark lending rate last week to stem inflation. "The minutes show the central bank is pessimistic about inflation and that's not good'' said a Sao Paulo market analyst. In the last 12 months the Real has appreciated 24.6%, which is the biggest among the 16 most traded currencies against the dollar. A surge in Brazilian commodity exports and capital flows to the local debt and stock markets has helped boost the local currency. But while this has been a blessing for Brazil's exports of products such as soybeans, iron ore and orange juice, profits at the country's manufacturing exporters have been eroded by the surge in the Real. "We want all companies to have a chance to be on the world stage" said Mantega adding that "we need to keep the fire burning so they remain interested and willing to access external markets". The package of measures follows months of central bank dollar purchases aimed in part at stemming the Real's rally. The dollar purchases have pushed the central bank's foreign reserves to a record 194 billion on March 10 from 57 billion two years earlier. Brazil Central Bank minutes of the March 4-5 policy meeting released this week show that high food prices and the fastest economic expansion in more than three years raised concern that inflation might overshoot their 4.5" target this year. Based on these data monetary policy makers left the benchmark rate at a record low of 11.25% percent at the meeting for a fourth consecutive time but also opened the door for a possible hike in the April meeting. Meanwhile in related news O Estado de Sao Paulo reported on its web site that the Brazilian government plans to increase the share of revenue it gets from the country's oilfields, according to Haroldo Lima, director of the Brazilian oil regulator, the National Petroleum Agency. Lima said the measure will be applied to all production projects but it still hasn't been decided if it will be necessary to change the oil law in order to increase the government's share of revenue.