beyondbrics

Remember the heated debate over whether Brazil was heading for a credit bubble?

With the world economy almost in a tailspin and Brazilian growth stalling during the third quarter of 2011, the talk of over-heating in the middle of last year now seems like a distant – almost fond – dream from another lifetime.

Yet full-year figures from Serasa Experian for Brazilian consumer defaults provide a timely reminder of those earlier concerns

According to the credit research company, Brazil reported the highest rise in consumer defaults in nine years in 2011. Consumer delinquencies rose 21.5 per cent during the year compared with 2010, the biggest increase since a 24.7 per cent jump in 2001.

“For Serasa’s economists, the rise in inflation, which reduced workers’ earnings, and high interest rates affected the capacity of consumers to pay amid a rise in indebtedness in 2011,” the agency said.

The fears of some hedge funds that Brazil was heading for a US-style credit bubble have failed to materialize. Indeed, as many economists have argued on beyondbrics, the direct analogy between Brazil and the US housing credit bubble is a flawed one.

The consumer credit market in Brazil does not follow obvious international norms. The local mortgage market is tiny. And a large number of consumer borrowers in Brazil take out loans with fixed interest rates rather than floating rates, insulating them from fluctuations in inflation and interest rates. And while the rise in defaults was big, the absolute figures for non-performing loans, although not released by Serasa, are within long-term trends.

Still, if Serasa’s figures are correct, the country’s consumers have indeed gone through a rough patch. This is not surprising – inflation spent a good part of the second half of last year above the central bank’s already generous target range of 4.5 per cent plus or minus 2 percentage points. This forced the central bank to increase interest rates to 12 per cent before it abruptly began slashing rates in August to head off an economic slowdown.

Concerns over consumer credit helped drive banking stocks down 20 per cent last year, with the sector contributing to weakness in the Bovespa benchmark index, which fell 18 per cent.

Yet the signs for 2012 are better. Serasa said defaults rose 13.1 per cent year-on-year in December – the lowest annual increase in 15 months – and actually fell 2.5 per cent compared with a month earlier.

The worry for banks and Brazil in general is that consumers are deleveraging and moving to cheaper forms of debt as they try to reduce their liabilities. The last thing a slowing Brazilian economy needs now is a reticent consumer.

Related links
Brazil slowdown presents chance to reform, FT
Brazil’s consumers go to ground, FT
Brazil must look to future, beyondbrics