Brazil Exempts Foreigners From Tax on Domestic Bonds

Published on September 30, 2009

President Luiz Inacio Lula da Silva scrapped the 15 percent tax on foreigners’ gains from federal government bond trading, bringing Brazil’s debt market tax regulations in line with other countries in the region including Mexico and Argentina. Chile also said today it plans to eliminate a 35 percent capital gains tax that some foreign investors have to pay on domestic bonds.

The move will help Brazil, the most indebted emerging- market country, sell bonds with longer maturities and lower interest rates by drumming up more demand from foreigners, said Nuno Camara, an economist at “Dresdner Kleinwort Wasserstein. Treasury Secretary Joaquim Levy said he expects foreigners’ holdings of lal bonds to double to $10 billion within a year.

“This will surely have positive implications,” Michael Discher-Remmlinger, who manages about $6 billion of emerging- market debt for Pacific Investment Management Co. in Munich, said in a telephone interview. Removing investment barriers “will lower costs to issue bonds for Brazilians as they get a broader investment base.”

Benchmark domestic bond yields fell today after the government published the measure in its official gazette. The yield on the fixed-rate government bond due in January 2007 dropped 3 basis points, or 0.03 percentage point, to 15.76 percent at 12:55 p.m. New York time, according to Banco Pactual. That’s the lowest yield on the bond since the government issued it a year ago.

Currency Rally

The yield has dropped 36 basis points this month as investors anticipated the bond tax measure and as they bet on interest-rate cuts by the central bank.

The currency also surged today as traders said the measure will bring more dollars into the country, undermining the central bank’s efforts to halt the real’s two-year rally. The real gained as much as 1 percent today to 2.1145 reais to the dollar, a five-year high. It has advanced 52 percent since May 2004, crimping profits at exporters and slowing economic growth.

“Dollars were already coming in without the tax break — just imagine it now,” said Carlos Alberto Abdalla, manager of foreign exchange trading at Corretora Souza Barros, Brazil’s No. 2 interbank foreign exchange brokerage.

Brazilians will keep paying the tax, the government said.

The government’s push the past three years to sell more fixed-rate local debt and less floating-rate local debt has led to a decline in its average domestic bond maturity, trimming it to 29 months as of January. Mexico’s average domestic bond maturity, by comparison, is 40 months. The U.S. average is 53 months.


“We want to lengthen the debt and reduce the proportion of bonds linked to the benchmark interest rate,” Levy said at a news conference in Brasilia today. He said last month that more than 30 percent of Brazil’s domestic debt will mature this year.

The tax elimination will cut government revenue by about $100 million a year, Levy said. That drop in revenue will be more than offset by a decline in borrowing costs as more foreigners buy local debt, pushing down government bond yields, he said.

The savings in interest rates will be significant,” Levy said.

The tax elimination comes as slowing inflation and the rally in the real have already piqued foreign investors’ interest in Brazil’s local bond market, Camara said.

People trading in emerging markets are excited,” Camara said in a telephone interview from New York. This should reinforce the trend of appreciation we have seen in the currency and further improve Brazil’s debt profile.”

Brazil’s annual inflation rate declined to 5.7 percent in January from 7.4 percent a year earlier, paving the way for the central bank to cut interest rates. Policy makers have lowered the benchmark overnight rate 2.5 percentage points since September to a 14-month low of 17.25 percent, helping spark the rally in the local bond market.

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