(Corrects day to Thursday instead of Tuesday in paragraph 1)
* Real seesaws after gov’t announces steps to arrest rally
* Brazil widens scope of foreign loans tax to stem inflows
* Mexico peso strengthens; Chile peso weakens slightly
By Guillermo Parra-Bernal
SAO PAULO, March 1 (Reuters) - Brazil’s currency seesawed on Thursday as the government widened the scope of a tax on corporate foreign borrowing, fanning speculation it will pursue taming capital inflows into Latin America’s largest economy more vigorously than expected.
The so-called IOF tax was extended to foreign loans with maturities of up to three years from two years previously. The move comes on top of Wednesday’s central bank dollar purchases and sale of reverse currency swaps aimed at soaking up future supply of the greenback in the local market.
The real reversed early losses of up to 0.3 percent and gained 0.1 percent to 1.7171 per dollar at 1024 local time (1324 GMT.) The currency, long regarded by banks such as Goldman Sachs Group to be the world’s most overvalued currency, has rallied 8.3 percent so far this year.
The move highlights concerns that short-term dollar flows are coming through disguised as intercompany loans, said Flavia Cattan-Naslausky, a strategist with Royal Bank of Scotland Securities. She said the move may do little to arrest the real’s rally, since many companies borrow abroad for longer than three years.
“We cannot discount the possibility of additional measures being announced to slow foreign exchange inflows if the currency continues to threaten breaking below” the 1.70 real-threshold “on a sustained basis,” said Nick Chamie, head of emerging markets research at Royal Bank of Canada Securities in Toronto.
Foreign investors seeking returns higher than those found in developed countries are pouring more money into Brazil, helping the real strengthen and, in the opinion of government officials, hurting local manufacturers by making the country’s exports more expensive overseas.
A Thursday report by local newspaper Valor Econômico, citing sources familiar with the situation, said that government officials are mulling a potential tax on foreign direct investment inflows while they remain in cash. The report said that the tax could be refunded once the funds are applied.
According to Valor, the government is worried that a meaningful portion of direct investment, the type of capital spending used for productive purposes, is parked in Brazil to earn returns on government debt - which pays one of the world’s highest borrowing costs.
“Taxing FDI inflows will be a very risky move given FDI is seen as helping to improve Brazil’s competitiveness, productivity and capital stock, so they will have to tread lightly here,” RBC’s Chamie noted.
In the year through Feb. 24, U.S. dollar inflows into Brazil totaled $12.533 billion. Much of that money has flowed into the nation’s stock market, helping boost the nation’s benchmark Bovespa stock index by 16 percent in the same period.
Other Latin American currencies traded mixed.
Mexico’s peso gained 0.4 percent to 12.8062 to the dollar in early Thursday trading, while the Chilean peso fell 0.3 percent to 481.20 to the dollar. (Reporting by Guillermo Parra-Bernal; Editing by Chizu Nomiyama)