By Mary Stokes.
In an interview with O Globo, Jerome Booth – head of research at Ashmore Investment Management –accuses Brazil of “insulting foreign investors” with its imposition of a financial transactions tax (IOF) on certain types of foreign borrowing. In March, the country extended a 6% tax on foreign borrowing to maturities of up to to five years. On 14 June, the government limited the tax to maturities of up to two years.
Rather than an insult, we view these capital controls as pragmatic. Brazil is trying to protect itself from a sudden capital reversal. Research has shown that when capital flows are dominated by volatile portfolio investment, they can be destabilising. Even the IMF has given a nod of approval to capital controls in certain circumstances. So far, capital flows – particularly FDI – have held strong in 2012, suggesting foreign investors still feel welcome.