Brazil eyeing capital control after upgrade-report

BRASILIA, May 4 (Reuters) - Brazil's government will debate adopting controls to manage an expected rise in capital inflows following last week's investment upgrade by rating agency Standard and Poor's, a leading newspaper reported on Sunday.

A cabinet meeting led by President Luiz Inacio Lula da Silva will discuss on Wednesday measures that could include taxes on capital inflows, O Estado de Sao Paulo newspaper said.

Lula has ruled out abandoning Brazil's floating exchange rate regime and did not consider measures to be urgent, Estado said.

"The solutions require sophisticated financial engineering," the newspaper quoted a Lula adviser as saying.

Standard and Poor's credit rating agency gave Brazil its first investment grade rating ever on Wednesday, causing currency and stocks in Latin America's largest economy to rally.

In March, Brazil began charging a 1.5 percent tax on foreign investments in government bonds on local capital markets in a bid to cut short-term capital inflows that have boosted Brazil's currency.

The real has gained almost 8 percent against the dollar so far in 2008, adding to a 20-percent rise last year. Some exporters complain it is undermining the country's international competitiveness.

Analysts expect Brazil's stocks, bonds and currency to rise further in the weeks ahead as the upgrade increases the pool of potential investors who can buy the securities. Many pension funds and institutional investors are barred from putting money into non-investment grade securities. (Reporting by Raymond Colitt, editing by Maureen Bavdek)