WHARTON UNIVERSITY: Brazil’s consumer credit markets: wobble but no fall

Brazil is undergoing an historic drop in interest rates that is revolutionizing access by corporates and consumers to loans. The spigot has been turned on. But is the flow sustainable or is a flood looming?

Even as the developed world beats a retreat from leverage, Brazil along with its companies and population, are rapidly plunging into debt. Despite a sluggish economy, credit keeps on growing. It reached 50.7% of GDP in July, up from 46.1% in the same month last year, according to official data from the Central Bank. That compares to a meager 21.9% of GDP just a decade ago. The speed of the transition and the growing sophistication of banks and consumers has been remarkable, says New York-based Celina Vansetti-Hutchins, managing director at Moody’s.


Brazilians, in line with many Latin Americans, were starved of credit thanks to a history of hyperinflation. That has made the Central Bank understandably timid in relaxing monetary policy and has stymied lending. Inflation lingered in Brazil longer than in much of Latin America, averaging 166% between 1987-1989 and staying high through 1994, when it was finally vanquished.

Interest rates had been warily following inflation downward until Dilma Rousseff became president. She put in place a dove as the new Central Bank president, Alexandre Tombini, who signaled that he was ready to do more.

And so he has. Since last August, Tombini has acted with audacity in a bet that global inflation pressures would remain subdued, says Alexander Gorra, senior strategist and head of the international platform in the Rio office of fund manager BNY Mellon ARX. In hindsight, that was a remarkably astute bet, he notes.

The Central Bank has brought the benchmark overnight Selic interest rates to 7.5% on August 29, a full 5% drop from a year earlier. Meanwhile, the Central Bank’s poll of economists shows a consensus forecast of 5.2% inflation this year. Brazil has gone from having some of the highest real rates in the world to real rates of just under 2.5% with the expectation that will fall further still. That creates a much healthier backdrop for the growth of credit.

Where does the Selic rate go from here? At the minutes of the latest monetary policy committee on released September 7, the Central Bank suggested that it is close to the end of the lowering cycle, although it did keep its options open saying that it could contemplate another cut with “maximum caution.”

Most economists see a further 25 basis point cut. Gorra thinks that the Central Bank may go further. “We’re expecting rates to come down to 7% by the end of the year, which is a little more aggressive than the market. They are likely to stay there for an extended period, probably through the second half of next year.”


If the Central Bank does take the Selic rate lower, it will help accelerate tendencies that are already well underway. The impact of lower rates is already reaching into every part of the Brazilian economy. For the first time in Brazilian history, a crack has been opening up for companies to borrow in their home market, says Paulo Oliveira, CEO at Brazil Investments & Business (BRAiN), which seeks to promote Brazil as a business destination.

Brazilian companies are starting to be able to issue long-term debt after years of operating on an almost completely unleveraged basis, says Oliveira. The impact of debt will soon be felt in infrastructure, he reasons. He estimates that Brazil needs $300bn each year to sustain 5% annual GDP growth and competes for this money with the other Bric countries. “This money is not going to come from the government,” he says.

The government is determined to boost the bond markets as a source of funding for companies and long-term infrastructure projects and is mulling a series of measures to stimulate the market, adds Oliveira. It is considering further tax benefits for Brazilians buying long-term bonds, with special benefits to cover infrastructure bonds.

That means much of the new debt will be raised through Brazil’s small but fast-growing corporate bond market. It is taking off with debenture issuance hitting a record of R$39.3bn through August 7 this year compared to R$48.5bn in all 2011, according to data from the Brazilian Financial and Capital Markets Association (ANBIMA).

If corporates are facing major changes to the way they raise money, the impact of looser monetary policy is even more visible in the consumer economy. Credit has already expanded out from very expensive instruments for use in emergencies only to a wide array of innovative instruments, including payroll deductions.

Other Latin countries, such as Chile, also have payroll-deducted credit – where loans are deducted from the paycheck before it reaches the borrower – but Brazil excels in this area, says Clive Botelho, finance director at credit specialist bank Banco BMG. Banks have also expanded and become more efficient in collateralized credit, especially in vehicles, he adds.

As interest rates continue to come down, the mortgage market is taking off as well. Housing credit is expanding at a fast clip and in July increased by 39.6% over one year earlier to just over R$242 billion, according to data from the Central Bank.

Much of the credit today is coming from a quirk of Brazil’s economy, a compulsory savings fund for workers that can be tapped for house purchases, Central Bank data show. But banks are rapidly entering the market. Public bank Caixa Econômica Federal (Caixa) predicts the mortgage market will grow 25% this year. The only question is: how many Brazilian consumers really have space for this in their budgets?


Before consumers can really celebrate lower rates, a further ingredient is needed. Lower bank spreads. Brazil has had some of the highest bank spreads in the world and a source of Brazilian banks’ eye-popping profitability. The silver lining: sky high rates ensure that at least debt is of short duration.

The government feels it has done its work in bringing down rates and has now turned its guns on bank spreads. Pressure has taken two forms. President Dilma Rousseff and Finance Minister Guido Mantega have used a combination of moral suasion and Brazil’s powerful public banks to drive down spreads.

Earlier in the year, Rousseff repeatedly and publicly criticized Brazilian bank charges, noting how much higher they were than the rest of the world. She calling Brazilian spreads “unsustainable and difficult to explain” on a trip to the United States. The all-in costs for late payment on my Brazilian visa credit card, on which I have never had a late payment, are a staggering 397.33% per annum.

This may seem absurdly high but spreads, at least on some products, have come down substantially. The average cost of financing a vehicle was just over 50% this time 10 years ago. Today, the average rate is slightly less than 21%, for example.

When Rousseff announced a drive for lower spreads, public banks including Caixa took up the challenge and promised to cut rates by as much as 88% for some products. In early August , the bank said that it expects to see  its loan book expand a huge 44% this year.

Lower rates from public sector banks has seen them capture a larger slice of the market. In the most recent Central Bank numbers, they accounted for 45.4% of the total credit in the financial system compared to 37.7% for domestic private banks and 16.9% for foreign banks.

Not surprisingly, given the very high interest on consumer debts, Brazilian banks need to keep a very close eye on non-performing loans (NPLs). There have been worrying signs, particularly this year. The Federation of Trade in Goods, Services and Tourism of the State of São Paulo (FecomercioSP) reported that in the city of São Paulo, 21.8% of families are reporting they are not servicing some debt. That is the highest figure since 2007, when it peaked at 23.5%.

Fears surrounding NPLs are compounded by a paucity of data on both good and bad payers, says Ricardo Loureiro, president of Serasa Experian, which analyses credit trends in Brazil. Consumer loans have a short history in Brazil, providing much fewer data for organizations to mine. That means patterns cannot easily be picked up. Moreover, many Brazilians taking out loans today are from social classes that banks would not have been eligible for such products 10 years ago, points out Vansetti-Hutchins.

These new consumers may act in a different way to borrowers who have experience of repaying loans, thinks Vansetti-Hutchins. Brazil has been slow to put together comprehensive databases covering consumer loans. Moves to create a positive credit bureau, which would keep records of consumers who had repaid loans, is bogged down in Congress.

Vansetti-Hutchins is cautious about the state of consumer credit in Brazil. In the last crisis, measures to boost credit by reducing compulsory reserves were successful but with credit already accounting for a higher percentage of GDP: “whatever measures are taken now will be less effective than in 2009,” she believes. “Overall, demand is much more catered to than it was in 2009 and moves to stimulate the consumer run into the whole, larger issue of a much higher overall debt load for consumers,” she notes. Delinquency rates on car loans have doubled and credit growth is unlikely to return to the levels of 2009-10: “those terms and conditions are over,” she asserts.

Vansetti-Hutchins doubts that private-sector banks will cut spreads down further just because the government would like them to. They are willing to go along with reduction in rates for some asset classes but mostly they are conservative and the lower rates they have published are largely cosmetic and highly conditional, she says.

Brazilian banks are facing a barrage of negatives, she believes. Higher delinquency rates are hurting and lower interest rates provide less return on deposits while competition from public-sector banks is much stiffer.

To push the banks to lend more, the government has been considering further measures to stimulate credit, which could include tax benefits for refinancing of debt. “This is too much. A negative loop is created and will encourage over-leveraged consumers to just swap into cheaper debt rather than paying debt down,” warns Vansetti-Hutchins.

Loureiro is cautious on consumer debt levels too. In September, consumers showed a little more eagerness to take on debt in a survey by Serasa Experian that predicts trends six months ahead.

At a recent congress on credit cards and consumer credit, he noted that this return of confidence comes after nine months of caution from Brazilian consumers in spite of the large and well-publicized fall in interest rates. There had been an “overdose of credit” in 2010-11, he noted. He is also concerned that NPLs have been increasing at a time of record low unemployment and while the economy has been growing. However, he believes that after a more cautious approach by private sector banks, the end of the tunnel may be in sight and the level of NPLs will slowly abate.

The other difficulty facing consumer lending is that the Brazilian economy has been cooling rapidly. GDP growth came in at just 2.7% last year and in the most recent poll of economists is expected to come in just a tad over 1.7% this year. Much of the slowdown is clearly related to the global environment and the dizzying drop in hard commodities prices, such as iron ore. But there have been signs that consumers are starting to get tapped out with higher non-performing loan levels and a first half retail slowdown.

The thaw that has been warming Brazil’s frozen credit markets has brought huge benefits for a population that has had access to borrowing only at rates that loan-sharks would charge in the developed world. Ironically, the worry now is that credit has been expanding too quickly. Is there a risk that Brazil follows the way of Europe and the US, relying too much on consumer growth to drive GDP forwards? And where is that equilibrium?  

Vansetti-Hutchins is cautiously optimism that with permanently lower rates and fierce competition between public and private sector banks, it will be increasingly possible for Brazilian consumers and companies to service their debts. The government should nudge but not shove banks to get its way.


About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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