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Capital Markets

Brazil: Tax hike hits stock prices

The Brazilian financials sector is set to suffer a hit on its profits in 2008 after the government increased banking profit taxes.

Banks have indicated that part of these tax increases will be passed on to consumers, which is also leading to concerns that lending rates in Brazil will increase, so slowing consumer borrowing.

On January 2, Guido Mantega, the finance minister, announced that the tax on banking profits, the IOF tax, would rise to 15% from 9%. In addition, a series of spending cuts were also announced as the government tries to plug a R$40 billion ($22 billion) hole in its revenues since the CPMF tax, a 0.38% tax on all financial transactions, was rejected by the senate in December 2007. As of December 31 the CPMF tax, which had accounted for 10% of government revenues, could no longer be levied.

The stock market plunged on the back of the tax increase as brokerages and funds reduced their Brazilian bank exposure to reflect expected profit declines.

The consumer market is also set to suffer. "The bottom line is that this tax increase will mean that banks will lend less because loans will cost more, and so fewer consumers will be able to afford them," says Ricardo Amorim, executive director for emerging markets at WestLB.

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