Brazil’s Tax Dodge Drift
Brazilian shares and the real were stuck in their slump despite the surprise removal of the 6 percent tax on fixed-income inflows as its champion Finance Minister Mantega pointed to less flush global liquidity condition than during the 2011 imposition. The levy endures for company short-term borrowing and may be reactivated without notice reflecting policy doubts that along with fiscal relaxation contributed to an S&P sovereign outlook downgrade. Annual GDP growth is under 2 percent with all categories outside agriculture showing poorly in the latest report. Inflation is above target at 6.5 percent in part due to currency pass-through as the central bank hiked rates another 50 basis points to 8 percent and is set to sustain that course in the coming months. The current account deficit is at 3 percent of output with FDI wavering to cover it. The primary budget surplus under standard accounting may drop to half the traditional 3 percent as government infrastructure projects attempt to lay the groundwork for consecutive global sporting events and lift the fixed investment rate to 20 percent of GDP. The World Cup will require $15 billion for facilities and transportation and private firms have shied away from participation with regular rule changes. The $6 billion offering of Banco do Brasil’s insurance unit has not reversed the sour exchange mood toward headline listings like Eike Batista’s OGX which has lost 90 percent. His empire extends to the beef industry where a large proposed merger will load up on additional debt. State oil titan Petrobras has also borrowed heavily abroad as it plans to auction off offshore pre-salt layer exploration rights Production after hitting 2 million barrels/day continues to decline as the new chief executive appointment by the President defends ambitious medium-term fundraising and exploration strategies. Banks have sold off after a 25 percent jump in small and midsize company bankruptcy filings in the first quarter under the 2005 “judicial settlements” regime. The Caixa Economica official network also experienced a brief run on rumors of a shutdown in the popular Bolsa Familia cash transfer program which includes 50 million citizens. Citigroup sold its consumer finance operation to private sector leader Itau as the US backed the Brazilian delegate’s ascendancy to WTO head over a Mexican candidate.
The Mexican peso was as well in the firing line as it breached 12 to the dollar and long-term bond yields jumped as crossover junk investors north of the border in particular shed positions. The outflow swamped the $2 billion Japanese retail players have plowed in as Q1 portfolio allocation was half the 2012 level on a 2 percent of GDP current account hole. Domestic demand weakness will keep economic growth from the original 5 percent forecast but structural reform optimism has revived from a passing spat between the ruling PRI and other parties with the financial package slated for a summer legislative wrap.
