MercoPress. South Atlantic News Agency

Brazil planning further taxing on the inflow of “speculative” foreign capital

National Confederation of Industries Robson Andrade president

The Brazilin currency rallied more than 1.0% on Friday closing at its strongest level since August 21, 2008. The Real jumped 1.16% to 1.612 per US dollar. The gains came after a Reuters report that the government has decided to tolerate a Real trading stronger than the 1.65-per-dollar market in the short term.

However Brazil’s National Confederation of Industries Robson Andrade said on Friday that President Dilma Rousseff recognizes the country has an urgent need to implement new foreign exchange control measures.

Speaking to journalists at the presidential office following a meeting with Rousseff, Andrade said the government could resolve the problem of an appreciated local currency “in the short term” by taking measures such as imposing quarantines and further taxing the entrance of “speculative” foreign capital.

“There is an urgent need for these measures because the dollar at Real 1.62 only encourages the purchase of products abroad,” Andrade said. “She agrees completely with this agenda and thinks we need to act in a rapid and efficient manner.”

Brazil's Real has strengthened about 2% over the past week after remaining near the level of 1.65 to the US dollar for several months. The currency has appreciated by more than 45% against the dollar over the past two years under the influence of ample global liquidity and heavy incoming foreign investment.

But the strong currency has been a burden for local industry, which has struggled to maintain exports and compete against heavy flows of imported goods.

However Brazil’s inflation over recent months has soared in response to rising global commodities prices, and some analysts have speculated that the government may risk allowing further appreciation of the Real to combat inflation.

Brazil in October imposed its IOF financial operations tax on foreign investment in local debt securities and derivatives at 6%, and subsequently took other non-tax measures to discourage the entrance of foreign currency, but the strengthening trend has nonetheless persisted.