Whispers that the Minister of Finance, Guido Mantega, is planning to raise the IOF tax (on financial transactions) once the elections are done and dusted are gaining traction. Mantega has been using some pretty strong language of late, using the word "war" to describe currency interventions, and the high real remains a thorn in the side of industrialists, with the powerful Federation of Industries of São Paulo repeatedly talking about its nefarious effect. Mantega has stated that he won't raise the tax ahead of elections but after that "who knows. It's clear that all possibilities remain open," he has said.
The reasons for a move to blunt the super-real are plain. The US dollar is buying less than R$1.70, the lowest level since the onset on the crisis, there's a growing consensus that the base rate (the Selic) is going to keep heading up from nominal levels of 10.25%, although the Central Bank professes otherwise, and the Bovespa is touching 70,000 again after Petrobras' successful share offering.
Existing legislation allows the MoF to raise the tax to 25% from current levels of 2%. When the 2% tax was imposed, it caused an uproar not because of the tax itself but because the government conspicuously failed to flag the move. There have been few signs of repentance and talk about "hot money" is once more being used in Brasilia. Claudia Safatle, a columnist at newspaper Valor, talks about other possibilities. They include higher deposits for investors at the BM&FBovespa, for example, as well as more direct intervention in the currency markets. These measures have their limits.
Investors should be prepared for the possibility of a sudden and unannounced change to the IOF tax once the election has been decided either in the first round (October 3) or the second (31 October).