The US QE3 programme has been rattling Brazil’s cage (again) with fears of renewed upward pressure on the real. That has been sparking questions over the government’s use of the IOF tax and whether it will be boosted or extended to new asset classes which would hit foreign investors in Brazil.
Advis International, one of the country’s most successful multimercado boutiques, reasons that the government needs foreign investors on team. “The government cares about liquidity in the bond markets. They still want foreign investors and are looking to diversifying bondholders of government debt. Even with rates at the low end of the cycle, Brazil still has to refinance debt and the government is looking to extend duration and needs to diversify the investor base and want to bring in more foreigners.” An increase in the IOF would undermine another aim of the Treasury, namely to issue real-denominated debt in global markets and extend out the curve offshore. “The government will try to hold down the currency using derivatives in the forward markets and accumulating more reserves.”
Bradesco Asset Management (BRAM) takes a nuanced approach. It recognizes that: “Brazil doesn’t need a lot of foreign investment as public debt is decreasing” but believes the government wants the doors to be wide open for infrastructure bond issuance. The ambitious infrastructure programme means the government will seek to minimize the use of the IOF. “The government is trying to create the minimum dislocation and that is the best you can do in the current environment.”