By Doug Gray, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – With the Brazilian boom predicated on the spending of previously unavailable lines of credit, economists’ fears of unsustainable levels of debt are clearly resonating with policy makers at the country’s Central Bank. With just one week to go before Christmas, the brakes are being put on and consumers are being encouraged to save rather than spend.
Figures from the Central Bank show that family debt has risen from 37 percent in May 2010 to 45 percent in September of this year, and that an estimated 25 million Brazilians will be late paying their bills in 2013.
The explosion of credit that followed a major shift in banking practices in the early 2000s saw consumer credit rocket from 23 percent of the total in 2002, to 46 percent. As with the housing market, there remains the fear that boom periods are rarely far from an equally dramatic bust.
Neil Shearing, Chief Emerging Markets economist at UK research consultancy Capital Economics, is particularly wary of the current climate. “I don’t expect a return to the fragility of the 80s and 90s,” he told The Rio Times, “but I do think that problems brewing in private debt could be problematic for the economy.”
Traditionally, Brazil’s fiscal policy has not often been characterized as proactive, as opposed to reactive. From the freezing of bank accounts under Fernando Collor in 1990, to rocketing inflation or the huge spending witnessed since the turn of the century. More recently, the Central Bank has been under heavy pressure to keep interest rates low which, according to Shearing, has seen it “backed into a corner by the government.”
The latest figures from the Serasa Experian economic consultants showed an increase in credit defaults of 1.7 percent in November compared to the previous month. There was, however, good news in the report, which showed an overall drop in credit default of more than ten percent compared with 2012.
As wages continue to grow, families are proving to be increasingly willing to stretch their resources in order to upgrade their car or home. “The context here is the last ten years of growth from consumer spending,” Shearing continues, “but is it sustainable?”
“Wages should go up in line with productivity, but we are in a period where they have been well above that marker. Commodity prices have gone up so businesses have been able to afford it, but previous thresholds and past form indicates that Brazil will have problems ahead.”
The likes of Banco do Brasil and CAIXA that had aggressively courted customers with attractive interest rates will now be encouraged to promote the less-profitable world of savings products. Third-quarter net income for Banco do Brasil stood at R$2.6 billion, while its loan book grew 22.5 percent to R$652 billion compared to the same period in 2012, suggesting it is the banks, just as much as their customers, that need to exercise fiscal responsibility if Brazil is to avoid the worst of what some economists are coming see as an unavoidable credit crunch.