Foreign investors have welcomed the Brazilian government’s decision to exempt them from paying tax on gains made from trading local sovereign bonds. President Lula da Silva scrapped the 15% tax last month as part of Brazil’s strategy to add depth to the local currency bond market. Local investors will still have to pay the tax.
Joaquim Levy, Brazil’s national treasury secretary, says he expects that the move will help double foreign investors’ holdings of local currency debt to $10 billion within a year.
The move will also help Brazil to reduce its external vulnerabilities. Another benefit is that it will enable Brazil to sell bonds with longer maturities and at lower interest rates. The decision “will make it easier for the government to move away from short-term, floating debt to longer-term, fixed-rate or inflation-indexed debt,” says Denise Prime, emerging markets debt portfolio manager at Henderson Global Investors. This, in turn, “will improve its debt dynamics and help reduce financing costs”.
The Brazilian government’s announcement comes on the back of its decision to buy back foreign debt as part of its strategy to improve its debt profile. Brazil plans to buy back debt in a stock of liabilities totalling $16 billion and $20 billion.