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LatinNews Daily - 05 October 2010
Brazil
Brazil: The government has lifted the tax on financial
transactions (IOF), levied on capital inflows, to 4.0% (from 2.0%) in an effort
to stem the rise in the Real, which closed yesterday at R$1.69/US$. The main
opposition candidate in the 31 October run-off presidential election, José
Serra, argues that Brazil's high interest rates are partially to blame for the strength of
the Real. Serra rattled some investor nerves earlier in the year with a rather non-committal stance on central bank autonomy. He argues in favour of a comprehensive tax reform in order to lower
Brazil's structurally high interest rates and to bring down the Real, allowing for
more export led growth and more domestic savings. He also, as part of his 2010 campaign, promised to lift
the minimum wage 18% in 2011. Arguably, that promise, along with tax reductions, could
risk overstimulating the Brazilian economy, leading to a bubble akin to the one
just seen in Western economies. The government candidate Dilma Rousseff also argues for a
tax reform, albeit more limited, but she has been more explicit about leaving monetary policy in the
hands of the hawkish central bank. She has also stressed that she would leave
the primary fiscal surplus target at 3.3% of GDP until the country's debt/GDP ratio
heads below 40% (it's currently at 60%). While there are doubts about the Lula
government's 'use' of the primary surplus target to conceal an effectively
expansionary fiscal stance, Serra may also need to better clarify his own economic policy stance in the second round debates.
