Fears Of A Brazilian Consumer Credit Bubble Are Overblown

Concerns of a U.S.-style credit bubble in Brazil have been circulating in and out of the headlines for over a year now. This is because high inflation and high interest rates have impacted the ability of the Brazilian consumer to repay debt.

But Marcelo Kfoury, Citi’s chief economist in Brazil doesn’t think it has a credit bubble. 

First a quick recap of the problem

Those crying credit bubble have repeatedly pointed to consumer delinquency rates which rose 21.5 per cent in 2011 from a year ago, according to a report by Serasa Experian. This is the biggest rise since 2002, when consumer default had climbed 24.7 per cent compared to 2001. 

Other headlines out of Brazil show banks increasing reserves as consumers struggle to repay debt. A report in Correio Braziliense via MercoPress non-government banks raised their bad debt reserves to 26 per cent in 2011, and government managed banks to about 14 per cent.

Why the credit bubble is imagined

Kfoury says despite the scary headlines the default rate is not significantly higher than the historical average, and is much lower than July 2009 as seen in the chart below. Even Serasa Experian’s figures show that defaults in December 2011 increased at their slowest pace since September 2010, and actually declined 2.5 per cent in December on a month-over-month basis.


Photo: Marcelo Kfoury / Citi

Moreover, Kfoury says household interest rates have always been high, and points out that the consumer debt burden is stable at around 22 per cent of total disposable income.

consumer indebtedness

Photo: Marcelo Kfoury / Citi

Finally, this chart from the National Treasury shows that despite significant growth in credit / GDP ratio in recent years, the Brazilian position is still below the international standard. And real estate loans with a growth rate of about 50 per cent in the 12 months ending in April, is only about 4 per cent of GDP.

credit to GDP

Photo: TesouroNacional

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