Brazil's real still a "buy" despite government measures

Fri Mar 14, 2008 12:35pm EDT
By Vivianne Rodrigues - Analysis
NEW YORK (Reuters) - Brazil's decision to change the rules for exporters, and introduce taxes on investments by foreigners in the local bond market, may have limited impact on the country's soaring currency.
Brazil said on Wednesday it will allow exporters to keep all U.S. dollars from foreign sales outside the country and eliminate a financial transaction tax on exports. Currently, exporters must repatriate 70 percent of revenue from overseas sales.
The measures were aimed at slowing the hefty inflows of U.S. dollars into Latin America's largest economy, which in turn have been helping fuel a rally in the currency.
Brazil's real is up more than 6.0 percent against the dollar since the beginning of the year, after a 20 percent surge versus the greenback in 2007. It last traded lower at 1.7032 to the dollar.
Despite Friday's drop in the real, for many strategists and investors the government is facing an uphill battle trying to curb the currency's gains.
"While there may be some knee-jerk reaction sending the dollar a bit higher, it seems unlikely that these measures will have a significant effect," said Clyde Wardle, an emerging markets strategist at HSBC Bank USA. HSBC forecasts the real will trade at 1.71 against the dollar by the end of the month.
The measures, which will be effective on Monday, are aimed at making Brazilian exports more competitive overseas, Finance Minister Guido Mantega said on Wednesday. The government plans more measures soon to stimulate exports, he said.
As the real has gained, export growth has slowed and imports have surged, shrinking the country's trade surplus. The current account balance of payments has swung into deficit, worrying some government officials.
The measures related directly to the export sector are "positive," Nilson Teixeira, a currency strategist with Credit Suisse in Sao Paulo said in a note to clients.
"They represent greater liberalization of the foreign exchange market and reduce costs for exporters," he added. "But we do not expect either of the two to have a significant impact on the inflow of dollars from export revenues or on the forex market."
"SHORT OF OPTIONS"
The government also plans to charge a 1.5 percent financial transaction tax on foreign investments in government bonds in the local capital markets in a bid to cut inflows of U.S. dollars. Mantega said the tax should cut short-term capital flowing into the country.
Foreign investors bought $20.5 billion worth of Brazilian government bonds in 2007. And in the first month of this year, the latest available figures show foreigners bought $1.6 billion worth of bonds.
"Now that's something I don't see working as the government expects it," said Samarjit Shankar, a global foreign exchange strategist at Bank of New York Mellon in Boston.
"Global investors are short of options, and Brazil is simply very attractive right now: high yields, inflation is somewhat controlled, there's low volatility and the economy is growing."
Shankar is recommending clients to hold assets denominated in Brazilian reais and he forecasts the currency may trade at 1.65 per dollar in coming weeks.
The taxes, Shankar said, are also not likely to have an impact on growth. Brazil's economy expanded at 5.4 percent rate in 2007 and according to government estimates, it is expected to expand another 5 percent this year.
"On top of everything else, nobody wants to hold U.S. dollars right now, which makes it a no brainer to buy Brazilian assets," he added.
(Additional reporting by Isabel Versiani and Elzio Barreto in Sao Paulo; Editing by Clive McKeef)