Investors saddled with losses as Brazil currency suffers sharp fall

Brasilia: Brazil's real is posting the biggest decline among major currencies this month, saddling foreign investors with losses, as the government steps up efforts to protect exporters in Latin America's biggest economy.

The currency has plunged 5.6 per cent against the dollar this month, the worst performance in the world after the Sri Lankan rupee. The real's tumble has helped hand investors in local-currency bonds a loss of 5.5 per cent in March in dollar terms, compared with an advance of 0.5 for Mexican peso debt, according to Bank of America Corp.

Brazil stepped up the pace of reductions to benchmark borrowing costs this month to diminish the allure of its fixed-income assets and stem investment that was fuelling currency gains.

Expanded taxes

The government, which also expanded taxes on foreign loans this month, is diverging from Mexico, which has shunned efforts to intervene in currency markets even as the peso gains 10.1 per cent this year, the most among major currencies.

"Brazilian policymakers are much more interventionist than the central bank of Mexico," Nick Chamie, the global head of emerging markets at RBC Capital Markets in Toronto, said in a telephone interview.

"In Brazil, what is partly underlying their more interventionist stance is they want to remain competitive when it comes to manufacturing, but the strengthening in the currency they see as detrimental to the industrial base."

Yields on Brazil's benchmark bonds due in 2021 have climbed 17 basis points, or 0.17 percentage point, this month to 11.5 per cent yesterday, data compiled by Bloomberg show.

The central bank cut its overnight lending rate 75 basis points on March 7 to 9.75 per cent, more than the median 50-basis point forecast by a majority of economists surveyed by Bloomberg. The bank has lowered borrowing costs 275 basis points since August.

"Brazil's main defence is administration of the currency rate," finance minister Guido Mantega said on March 13 in Senate testimony.

President Dilma Rousseff, on a trip to Germany earlier this month, vowed to take all necessary measures to protect the world's second-biggest emerging market from what she dubbed a "monetary tsunami" created by developed nations seeking to devalue their currencies.

Brazil extended a 6 per cent tax on foreign loans and bonds issued abroad to include lending with a maturity of as much as five years. The tax, which originally applied to foreign borrowing of up to two years, had already been extended on March 1 to include loans of three years.

Officials at Brazil's central bank and Finance Ministry who asked not to be identified in accordance with policy declined to comment in emailed statements.

While annual inflation slowed in February to 5.85 per cent, the rate remains above the target of 4.5 per cent, plus or minus two percentage points.