Brazil frees exporters from tax on currency hedges

Brazil exempted exporters on Friday from a tax on currency hedging in a bid to minimise the side effects on the economy of sweeping measures to tame a strong local currency. In a presidential decree, the government slashed to zero a financial transactions tax on currency hedging operations by exporters. The tax was set at 1 percent in September, shortly after Brazil's currency, the real, hit a 12-year high.
President Dilma Rousseff's government repeatedly has adjusted the so-called IOF tax to beat back a flood of dollar inflows fuelling the real's appreciation. While local industries applaud the government's efforts to curb the real, exporters also have complained that some measures hurt their ability to effectively hedge against a volatile exchange rate. Finance Minister Guido Mantega said on Tuesday that the government was working to reduce the unwanted effects of its battle with the appreciating currency.
"First we implement a currency measure. Then we study how to eliminate the collateral effect," he told lawmakers in Brasilia. "It's necessary to perfect measures so they only have the desired effect. But sometimes you have to fire the 12-gauge shotgun and, well, that sprays some buckshot." The decree on Friday was meant to lower the price of Brazilian goods overseas, while cutting down on speculation in the foreign exchange market, Finance Ministry officials told reporters in Brasilia.
Rousseff has blamed loose monetary policy in developed economies for the foreign cash flows into Brazil's financial markets boosting the real. The stronger currency has unleashed a flood of cheap imports and hurt the competitiveness of struggling Brazilian industries.
The real has lost around 5 percent against the dollar this month, among the world's worst performing currencies, after tax measures and more aggressive market interventions by the central bank reversed a 9 percent rally in January and February. The lighter tax burden is especially relevant for exporters of raw materials such as grains, coffee and iron ore, an area where Brazil is a powerhouse. Commodities traders typically hold positions in the forex market to hedge against the risk of swings in the exchange rate. The IOF tax on such operations raised costs for commodities traders, reducing profit margins.