Brazil’s Derivative IOF Could Encourage Global BRL

Neither bankers nor investors see the Brazilian government’s new IOF tax on derivatives diminishing the attractiveness of overseas issuance by the country’s companies. Indeed, the move may be another reason for accounts to migrate to the global BRL market as they look to avoid the increasingly onerous tax burdens being imposed onshore. “If the gap we’re seeing between offshore and onshore levels remains, it could make global BRL issuance more attractive [to investors],” says a New York based DCM banker. The new tax will likely make it cheaper for international buyers to hedge currency risk offshore, he adds. “This should drive more investors into global BRL,” adds another banker, noting a secondary rally in outstanding global-BRL bonds. “It will not change investing behavior fundamentally, but it will make things a bit more expensive for us,” says a North American EM debt portfolio manager. He explains that even if he hedges offshore, he expects it may still involve a counterparty using onshore hedging, and the cost is likely to be passed on. So far the impact of the new tax, which is part of the government’s effort to contain the strength of the BRL, has had a greater impact in the FX markets, where liquidity has already fallen and is expected to shrink further with Goldman Sachs downgrading the stock of BM&FBovespa on the expectations there will be fewer transactions. This could deter fast money, but the larger question for buy-and-hold types is the overall direction of government policy. “If investors see more and more controls coming, you will see a lot of interest move away from Brazil,” an EM bond investor says.