Brazilian stocks, currency fall as tax hikes spook investors

SAO PAULO: Brazil's equities and currency tumbled on Tuesday after the government hiked taxes on banks and the chemical industry while cutting them for diesel and cooking gas, rattling investors with President Jair Bolsonaro's latest economic intervention.

The US dollar strengthened about 2% against the real, sending the Brazilian currency to a three-month low despite a central bank auction selling $1 billion in the spot market.

The benchmark Bovespa equities index fell as much 2.7% in morning trade, with all but one of its constituent companies in the red, before paring losses to 1.3% by midday.

Many investors took the sudden shift in tax policy as a sign Bolsonaro has turned his back on the free-market promises of his 2018 campaign, as his polling numbers slip ahead of his race for re-election next year.

"For the first time, I'm starting to lose faith and feel uncomfortable," Dan Kawa, analyst at TAG Investimentos, said in a note to clients. "I hope they stop here, but the signs are that economic liberalism has been put aside and populism is gaining ground in the (political) agenda," he added.

Brazil's financial markets have been volatile since last month when Bolsonaro canned the chief executive of state-run oil firm Petrobras for raising fuel prices.

Roberto Castello Branco, the outgoing Petrobras CEO, had vowed to track global oil markets, and his dismissal spooked investors fearing a return to costly government interference in Brazil's most important company and the economy as a whole.

Economy Minister Paulo Guedes, an ally of Castello Branco and staunch defender of orthodox economics, was conspicuously silent during the episode, suggesting his influence has waned.

"This decision generates institutional uncertainty," said Paloma Brum, economist at Toro Investimentos, regarding the sudden shift in tax regimes. "In the context of an economic crisis, it generates uncertainty over whether the government will really follow a liberal agenda," she added.

Among the major losers on Tuesday were Petroleo Brasileiro SA, as Petrobras is formally known, and state-run power utility Eletrobras, which both fell almost 5%.

In a statement late on Monday night, the president's office announced plans to hike the CSLL income tax for financial institutions to 25% from 20% from July 1 to Dec. 31.

The government also plans to eliminate the special REIQ tax regime for chemical producers such Braskem SA, whose shares fell nearly 4%.

Those tax hikes partially offset Bolsonaro's executive measures zeroing the PIS/Cofins federal taxes on diesel for two months and cooking gas indefinitely. Last month, Bolsonaro vowed to bring down fuel costs as truckers threatened to strike over rising prices.