Taxation and other measures to stem the flow of unwanted U.S. dollar investments into Brazil are having an effect, the Central Bank said as it released data indicating an 88 percent drop in April inflows.
Foreign investors attracted to Brazil's interest rates and looking for new business opportunities in the Latin American country have pushed upward the value of the real, Brazil's national currency, with adverse effects on consumer spending and exports.
High FDI rates have raised the risk of overspending and inflation, officials said.
Central Bank officials said higher taxes on foreign money deals, including loans and debt sales, were aimed at shielding Brazil from currency wars and would be maintained until further notice.
Brazilian government officials blame China and the U.S. Federal Reserve Board for the global currency fluctuations that have caused difficulties for Brazil.
Officials said that taxation measures aimed at protecting the money market and the Brazilian currency were having an effect after several months of Brazilian regulators grappling with FDI that pushed up the real's value, confounding monetary planners.
Brazil received net inflows of $1.54 billion in April from trade and investments, down from $12.7 billion in March and $2.25 billion in April 2010, Central Bank data indicated.
Analysts cautioned against optimism the strategy could work without costs to export industries and consumer confidence.
In March Brazilian President Dilma Rousseff decreed a tax increase affecting international bond sales and loans with an average minimum maturity up to 360 days. A few days later, she applied the higher tax to renewed, renegotiated or transferred loans of up to two years. Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the duration exceeded three months.
Taxes on foreign investors' fixed-income purchases were also increased.
The Central Bank figures showed the effect of the regulatory measures was recent while the trend in previous months showed a continued influx of investors and liquidity.
Inflows in the first four months reached $37.1 billion, 52 percent more than the $24.4 billion Brazil received in the whole of 2010, the bank data indicated.
An outflow of $1.77 billion related to investments in April, the first since December last year, was offset by $3.31 billion in trade flows that resulted from higher prices for Brazilian exports of soy, beef, iron ore and other commodities.
Foreign direct investment into Latin America and the Caribbean is projected to grow 15-25 percent this year, data from the United Nations Economic Commission for Latin America and the Caribbean showed. Not all of that FDI is welcome. Chile is also grappling with FDI inflows that officials there say have overvalued the peso.
Current projections for Brazil indicate the Latin American economic leader will attract $55 billion of FDI. Analysts said that estimate might change in view of the latest regulatory curbs.
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