Calls are growing for more punitive capital controls on
foreign investors in Latin America amid mounting fears that a
tide of liquidity is fuelling export-damaging currency
appreciation and asset bubbles in domestic financial
Jose Antonio Ocampo, the former Colombian finance minister,
said that Brazil should reinstate a 2% tax on equity market
inflows in Brazil, known as the IOF, that was scrapped last
year to breathe life into domestic markets.
More controversially, he told Emerging
Markets that Brazil should also consider imposing a tax on
foreign direct investment (FDI).
His comments came as the Brazilian government yesterday
announced a further tweaking of policies designed to boost
pressured exporters, exempting them from a 1% IOF tax on
Ocampo, a member of a high-level task force on
regulating global capital flows, spearheaded by the Global
Economic Governance Initiative at Boston University. Said:
In order for capital controls to be effective, they need
to hurt foreign investors.
In principle, I am against a tax on FDI but it is
clear that short-term capital flows are being disguised as FDI
in Brazil so some sort of capital tax on this should be
Foreign investors are accused of circumventing capital
controls by disguising portfolio flows as equity investments in
local subsidiaries, which then purchase short-term bonds whose
proceeds are repatriated abroad as profit or dividends.
It is no secret that many companies are doing this so
in order to circumvent capital controls, Tony Volpon,
Brazil strategist at Nomura, said. The short-term benefits of
capital controls on FDI outweighed the potential for market
distortions and lower rates of investment, Ocampo said.
On Monday Brazil broadened its 6% tax on foreign debt
borrowings to include maturities of up to five years, up from
three years previously, in its latest attempt to weaken the
The move was seen by bankers as likely to be
ineffective in curbing portfolio flows since external corporate
bonds were typically issued with 10-year maturities.
Alberto Ramos, chief economist at Goldman Sachs said the
Brazilian measures could perturb investors because of their
unpredictable nature. That could hasten moves by investors to
consider investments in other countries in the region although
markets are not as deep or liquid, he said.
Alexandre Gorra, senior strategist at BNY Mellon, said
Japanese investors, with up to $50 billion mainly in bonds,
were starting to redeem with recent outflows of $750 million.
IOF taxes are not good for investors although some see it
as necessary evil, he said.
However, with firm global commodity prices and historically
low interest rates in the developed world likely to remain
entrenched, capital flows to South America are set to remain
In Colombia, Ocampo, who imposed capital restrictions as
finance minister, said taxes should be imposed on external debt
borrowings and foreign investments in domestic securities.