beyondbrics

Now it’s time for Neil Shearing of Capital Economics to weigh into the debate on the Brazilian credit bubble.

On the bubbleometer scale between Paul Marshall and Amit Rajpal of Marshall Wace (Brazil risks “a fully fledged credit crisis”) and Roberto Attuch and Fabio Zagatti of BarCap (consumers are not overstretched at all), Shearing is closer to Tony Volpon of Nomura Securities (no credit bubble, but consumers are overstretched). But he adds a thumping warning: consumers are so overstretched that Brazil’s economy is about to hit a wall, with growth falling to 2.5 per cent in 2013 from 7.5 per cent last year.

In a note to clients on Tuesday, Shearing first gives two reasons not to worry about a credit bubble: banking lending to the private sector including consumers is not growing especially quickly (23 per cent a year to consumers, including mortages), and is still quite low as a share of GDP (at about 19 per cent, compared to 100 per cent in the UK).

Then he says why we should worry, after all:

Nonetheless, there are still good reasons to be concerned about the pace of consumer credit growth in Brazil. Most obviously, while the stock of outstanding debt is reasonably low, the cost of servicing that debt is very high – the average interest rate on consumer loans is just over 45%. Hence, various estimates that the consumer debt service burden has risen to an eye-watering 28% of disposable income (compared to a peak of just under 19% in the US prior to the global crisis).

Shearing admits (as Attuch argues) that estimates of the debt service burden may be exaggerated, especially given the size of informal economy. But he continues:

Even so, all the signs suggest that Brazilian consumers are overstretched. We estimate that simply servicing the interest on existing consumer credit now eats up around 18% of disposable income. By any measure, this is too high. The fact that non-performing loans (NPLs) have started to pick up despite the current strength of the labour market adds to the cause for concern.

This is a controversial point. Attuch reckons delinquency is actually declining. Most others interpret recent data, such as that from Serasa Experian, which tracks consumer credit defaults, as showing delinquency is sharply on the rise. Nevertheless, Shearing concludes:

The upshot is that the current pace of consumer credit (and consumer spending) growth seems unsustainable. As a result, we think the economy could be heading for a rocky period – we’ve pencilled in GDP growth of just 2.5% for 2013.

Like Attuch and Volpon, Shearing sees little risk to Brazil’s banking system. But saying the banking system is in the clear is not the same as saying everything is OK. Brazil’s inability to deal with its structural problems – such as tax and labour inefficiencies and, especially, very high public spending for very little return – have always threatened not outright catastrophe but, rather, a failure to deliver on enormous potential. If Shearing is right and Brazil is about to lose 5 points of GDP growth in three years, Brazilians may wake up to the fact that they are losing something well worth saving.

Here is Shearing’s closing chart.

Related reading:
Brazil credit crisis? No way, says BarCap, beyondbrics
Brazil risks tumbling from boom to bust, FT
Guest Post: Brazil – no credit bubble, but an overstretched consumer nonetheless, beyondbrics
Brazil credit bubble fear as defaults rise, FT
Guido Mantega: What, me worry? beyondbrics
Keeping an eye on the Brazilian bubble, beyondbrics