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Brazilian government stuck with appreciation dilemma

Measures to boost the competitiveness of Brazil’s exporters might well be fruitless.

The Brazilian government is in a dilemma. In a last-ditch attempt to stop the appreciation of the Brazilian real undermining the competitiveness of its exporters, the government has imposed a new tax on foreigners buying local debt.

Brazil’s exporters are happy that the government has finally acted. But analysts are concerned that the authorities might suffer a rising risk premium from deterring foreign investors, without achieving the desired benefit of halting the real’s appreciation.

In mid-2007, the Brazilian real was trading at two to the dollar, and by the end of the year it had reached a new level of 1.77. The real closed 2007 17.15% higher against the dollar than 12 months earlier. At the end of February the real dipped below 1.70 to the dollar.

The government enacted the measures on March 17. Now exporters are allowed to keep all their foreign currency revenues from foreign sales, as opposed to having to repatriate 70%. Exporters are also now exempt from the 0.38% financial transactions tax. However, the most controversial new measure is a new, one-time up-front 1.5% tax on the initial FX transaction for all foreign investments in Brazilian fixed-income accounts.

Investors and analysts are split on whether this final measure is a good move.

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