Brazil to Tax Savings to Keep Easing Interest Rates
May 13 (Bloomberg) — Brazil plans to begin taxing interest on some savings accounts and may lower taxes on fixed-income funds to maintain demand for government bonds as the central bank cuts the benchmark rate.
The tax on earnings from savings accounts of 50,000 reais ($23,900) or more, which will go into effect next year if approved by congress, removes the biggest impediment to future interest rate cuts, central bank President Henrique Meirelles said. Currently, interest income from the so-called poupanca accounts isn’t taxed.
The government is concerned that investors will abandon the debt funds it relies on for bond sales as the benchmark interest rate is set to drop below 10 percent, and turn to savings accounts, which by law guarantee at least a 6 percent return. Policy makers slashed the so-called Selic rate to a record low 10.25 last month in a bid to revive growth in Latin America’s biggest economy.
“We want to discourage investors who today are in other funds from migrating to savings accounts,” Finance Minister Guido Mantega told reporters today in Brasilia. “If there was a big migration, the savings accounts would stop being a safe haven and begin attracting speculators.”
Meirelles said today’s changes could allow the bank to make “substantial reductions of interest rates in Brazil” if needed.
‘Distortions’
Gustavo Franco, central bank president from 1997-1999, said the “distortions” in the financial system caused by falling interest rates is a problem Brazil is “lucky” to have.
Banks that for decades earned returns of at least 20 percent on government bonds, the legacy of hyper-inflation that reached 6,800 percent in 1990, will have to boost lending to more economically productive areas, he said in an interview on May 8.
“The poupanca is just the tip of the iceberg,” said Franco, the chief strategist at Rio de Janeiro-based money manager Rio Bravo Investimentos. “Banks that have been working in one mode for years, adapted to the old environment of high rates, will have to change. The potential for transformation is limitless.”
Savings accounts only will be taxed if the Selic is below 10.5 percent, Mantega said. Any tax breaks on fixed income funds would be temporary, for this year only, until the new levies on savings accounts are enacted, said Bernard Appy, a special adviser to the Finance Ministry.
Demand for Bonds
“The demand for government bonds will be preserved by these moves,” said Roberto Padovani, chief economist at Banco WestLB in Sao Paulo.
The yield on Brazil’s zero-coupon bonds due January 2010 declined five basis points, or 0.05 percentage point, to 9.44 percent. Economists expect policy makers to cut the benchmark rate to 9.5 percent at their next policy meeting in June, according to a central bank survey published May 8. The Selic will remain below 10 percent until at least 2011, the same survey of 100 Brazilian economists found.
Mantega said the changes won’t affect the “great majority” of small savers.
The Popular Socialist Party, Brazil’s third-biggest opposition party, ran a television ad this month comparing the government’s plans to former President Fernando Collor’s 1990 confiscation of the savings accounts. Collor was impeached two years later.
“Million of Brazilians save part of their hard-earned wages in a savings account to build a better future,” the country’s three biggest opposition parties wrote in May 7 joint statement. “To meddle with the savings accounts is to penalize the workers twice: with the unemployment brought on by the economic crisis and with the risk of seeing their savings eroded.”
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Joshua Goodman in Rio de Janeiro jgoodman19@bloomberg.net
By Andre Soliani and Joshua Goodman
Last Updated: May 13, 2009 16:08 EDT