Debt and Taxes in Brazil

Brazil is in bloom, economically speaking, and the international media has stirred up a frenzy of excitement about the robust and ever-expanding Brazilian economy. But as I've written several times before, this trend of stability and wealth mixed with blind optimism is not necessarily sustainable in the long run, and if there is any example to indicate this, it's the U.S. experience. There are so many lessons to be gleaned from our hubris, overspending, and inattention to the big picture, but who wants gloom and doom when things are looking up?

There are plenty of great stories about Brazilians opening new businesses and getting new job opportunities, being able to buy washing machines for the first time, or having luxuries they never had before. But when you look on more of a micro level, there is cause for concern, or at least caution.

Brazilians are up to their ears in debt, and the first line from one article about debt was "Brazilians have never owed so much." Because of expanded credit, extended financing on anything and everything from vacations to groceries to toilets, and greater access to loans, consumers are spending more than ever. In 2009, consumer debt in Brazil hit R$555 billion, or US$308 billion, which encompasses 40 percent of total income that year. According to LCA Consulting, if all of those debts were collected with interest all at once, each Brazilian would owe five months of income. However, despite such a large debt burden, Brazilians have more time than ever before to pay off their debts; from 2006 to 2009, average financing rose from 17.3 months to 31.1 months. Economists can't seem to agree on the risk of defaulting, but once employment slows down, they expect it will rise.

Besides being able to pay for many goods and services in installments and having access to credit and loans, as well as expanding employment and salaries, there remains another problem: many consumer goods in Brazil remain very expensive, with prices far above average salaries. Technology is the most obvious; it is one of the most expensive countries in the world to buy computers, and is the most expensive country to buy an iPod. It is also one of the most expensive countries for telecommunications: cell phones and cell phone/land line services. (Despite this, 78 percent of Brazilians owned a cell phone in 2009--another source of consumer debt.) Internet services are also among the most expensive in the world. Even though Brazil is a major auto producer, cars are also very expensive on a global scale: imported cars are sometimes less expensive than domestically produced cars, despite high import taxes, and in 2009, there were more foreign cars imported in Brazil than Brazilian cars exported abroad.

Evidence of the high cost of goods in Brazil can be found in the tourism deficit: in January 2010, while foreign tourists spent only US$566 million in Brazil, Brazilian tourists spent US$1.21 billion abroad. In New York, for example, many tourists buy all sorts of electronics (while Eli was touring with his sister, he saw one woman buying four laptops at once), as well as other items that are cheaper abroad.

Finally, despite great progress in employment levels, salaries are still surprisingly low for a wide range of jobs (though cheap labor has been a key factor in Brazil's economic success, even though Brazilian labor is more expensive than in other developing countries). Estadão recently promoted this really cool online tool where you can look up the salary of practically any job in Brazil, or search by state and other factors. To give one example, the average salary for an accountant in Brazil is R$2,425 per month (R$29,100 per year, or US$16,166), while the average salary for an accountant in the US and Canada is between US$40,000 and US$80,000 per year. While the average cost of living in Brazil is lower than in the US or Canada, those services/products discussed above are still very expensive in comparison to wages.

While there are a number of factors that affect the cost of consumer goods, import taxes are the most obvious factor that drive up costs, especially for technology. Lowering these taxes would make a world of difference for Brazilian consumers, though it seems unlikely the government would dramatically change the lucrative system it has in place.

Comments

[Corinne]

you are forgetting that credit is also extremely expensive. Credit card rates average 10 to 12% A MONTH and overdraft credit for checking accounts is around 8 or 9% A MONTH. So not paying off loans or credit cards every month spirals you into unserviceable levels of debt very fast. The current credit market in Brazil must be placed into the context that for so many years, the currency was not stable enough for credit and so many consumer goods were completely out of reach for anyone who could not pay cash. The trend has been for expansion of the credit market and lowering of interest rates, which could be a double-edged sword (easier to pay off debt, but also easier to get into debt in the first place).

[Luís Guilherme Fernandes Pereira]

Just a small correction: it was the São Paulo state government ("Estado de São Paulo" the state, not the newspaper) who released the salariometro (incometer ;)) website.

[RioGringa]

Thanks, Corinne - this is an extremely important factor as well.

Luis, Estadao (the newspaper) was promoting the salariometro on its website - that's how I found it.

[Marcio Bernardo]

Oi "Gringa", parabens pelo blog que eh sempre interessante e atual (eu li sobre o caso Sean Goldman aqui). Nem sempre eu concordo com as suas colocacoes mas acredito que vc nao tem preconceito ou agenda em relacao a sua visao do Brasil.

Comparacao de renda/nivel de vida entre paises eh extremamente complexo... teoricamente vc deveria que "normalizar" usando ppp (http://en.wikipedia.org/wiki/Purchasing_power_parity), uma renda mensal de 2,425 eh considerado Classe media baixa no Brasil e 60K por ano eh Lower Middle-Class nos EUA (http://en.wikipedia.org/wiki/American_middle_class)a grande diferenca eh o acesso a procutos electro/eletronico como vc mesmo disse... mas socio-economico e politicamente eh basicamente a mesma classe economica

[embecker]

Gostei bastante do seu post hoje. Bem legal, e bom uso do salariômetro. O que continua me impressionando é como o salário de vários empregos no Brasil é tão baixo comparado aos EUA, mas a cidade de São Paulo é a 3a cidade do mundo em termos de custo de vida. Dificil mesmo.

[Jessica]

great article :-) import taxes are, as you say, just out of this world. i sent a relative in brazil some eye-glasses recently and the import tax that she had to pay was something like 125%. just nuts. it's obviously a huge stream of revenue .. but also starts to look something like protectionism .. and if what i saw on my recent visit is true, it seems to make imported goods even more desirable than locally-manufactured equivalents, because the price adds such a huge amount of prestige ..

[Marcio Bernardo]

Mercer Consulting has a respected and widely used rank of most expensive city in the world

(http://www.mercer.com/costoflivingpr#Top_50)

Sao Paulo is the 72nd most expensive city, 3rd in Latin America (but it seems there is a huge gap between 1st LatAm (Caracas) and 2nd (Sao Paulo))

Jessica, unfortunatelly protectionism is alive and well in many countries not only Brazil (check the tax Brazilian products such as OJ, sugar and ethanol has to pay to enter US market)

[Paulo]

Hello Gringa,
I liked your comments but I thought a bit over prejudice, for example: "being able to buy washing machines for the first time". That's not true at all. All classes of Brazilian, even the lower class are able to have a washing machines. How the would wash their clothes if they work all day? We know that inequality is a bigger problem in Brazil, yet.
Thank your for your post.
Paulo

[bambooska]

I really doubt it will change. And because of loans and credit cards, our nation is consisted of 52% middle class. Which, in theory, is a good thing.

[Tritone]

There has to be some way to make money off of this ipod/electronics situation.

An American could fill up a suitcase full of ipods, Psps etc, go on 'vacation' in brazil, sell them at a discount to brazilians, and make a ton of money.

Are there any laws againts that?

[Rio Gringa]

hey guys!

paulo, unfortunately, there are Brazilians who don't own washing machines. Not only is this an example I got directly from articles about the growing Brazilian middle class, but I can also personally vouch for the fact that my husband's aunt, who runs a household of 5, just got a washer for the first time last year (she cried). I have no idea how she did it beforehand.

Tritone, you are only allowed to bring up to US$500 worth of goods into Brazil. If you go through customs and they see you have 50 ipods, it's not good. But under $500 worth of new stuff is allowed.

[Tritone]

Paulo disse:
-------------------------------------------------
How the would wash their clothes if they work all day?
--------------------------------------------------

Funny. Do Brazilians even wash their own clothes, or do they have their domestic servant do it for them?

[Ryan Vaquero]

The issue of the growing middle class in Brazil immediately going into debt is important and it's something that I've discussed with a lot of Brazilians I know.

One BIG difference, though, between the U.S. and Brazil on personal credit card debt is the way in which the debt is handled by the credit card companies -- perhaps owing to the regulatory laws that exist (or, in the US's case, don't exist) in each country.

For instance, I know MANY Brazilians who intentionally get credit cards and burn through their credit limit. Many people from the US do this, too, but to my surprise, the credit card company in Brazil then negotiates with the debtor and keeps DECREASING the amount owed in order to get whatever they can out of the debtor.

In the US, of course, the interest keeps piling on and on until many families are ruined by the debt they've incurred. In Brazil, payment plans are much more common (even on Brazil's equivalent of Orbitz ... sites where you can buy plane tickets ... there's always the offer to pay the price of the ticket in an installment plan). And, credit card companies always seem willing to forgive a certain percentage of the outstanding debt over and over again, until the person is able to pay off the decreased amount.

When I found out about this, I was shocked! I have yet to figure out how this can be although my hunch is that it's related to regulations. Gringa, if you have any insight into how this happens, I'd certainly be interested to hear what you think.

I also want to add one piece of analysis that's missing here but is important to just about any topic related to Brazil. For the past 10 years, Brazil's government has been guided by the socialist PT (Worker's Party), which co-founded the Foro de São Paulo with the Cuban Communist Party and they are openly committed to "21st-Century Socialism" in Brazil and all of Latin America (even if this is down-played in day-to-day news coverage, Lula has fulfilled every commitment required of his government per the Foro de São Paulo agreements).

This is important to bring up because it means that the directions that US society and Brazilian society are headed couldn't be more different and it shouldn't be assumed that what happened with the US's indebted middle class will probably be very different than what happens to the Brazilian middle class debt. Whether we are looking at Dilma & then Lula again, or a 2-term Dilma presidency, Brazil will continue down the path towards socialist-guided decisions in key policies.

[Marina]

Many brazilian have domestic servant, whoever, if they can afford to pay a domestic servant, they also will certanlly have a wash machine.
It´s also known that in Brazil is very common having a domestic servant more that any other Country I´ve known. They aren´t paid well. They make about 530,00 real a month.

[RogerPenna]

Marcio Bernardo, PPP includes only a small list of products and services. Obviously, most products which are more expensive in Brazil than anywhere else in the world are left out of PPP calculation by our government, so they can keep to lie to use how life is good here and how things are not that expensive here nor our salaries are that low. Dont buy Lula´s lies!

@Paulo: come on man, dont talk nonsense. A minority of brazilians have washing machines. Most brazilians (class C, D and E) will wash their clothes at the TANQUE!

Its not for nothing that brazilians have the term "barriga de tanquinho" (tank belly) to describe a man´s belly full of muscles... most foreigners may not even understand because I guess most of them never saw a clothe washing tank before!

[Jake]

Gringa:
1. Talking about credit: total real estate financing / GDP is in Brasil a mere 2%; in the US 69% and Europe +100% in many countries.
http://www.emergingsouth.net/renting-versus-buying/
2. External debt / exports in Brasil is a mere 6,8%. The US external debt / exports are a staggering 67,61%.
http://www.morssglobalfinance.com/debt-get-out-of-europe-japan-and-the-us/

Brazil's credit market can grow exponential before it reaches the size of the US or European credit markets. Brazil is complete underleveraged today.

[Vera]

Hi Rachel,

Publiquei no meu blog um post sobre a diferença do poder de compra entre brasileiros e australianos (http://braziliantalk.blogspot.com/2009/11/poder-de-compra-de-brasileiros-e.html). O post é baseado na pesquisa Prices and Earnings, da UBS, que faz essa pesquisa desde 1971. Ela compara o poder de compra das pessoas em 73 cidades pelo mundo, e inclui o Rio de Janeiro, São Paulo, Sydney, Nova York etc.

O que eu acho legal dessa pesquisa é que ela compara alhos com alhos, e não com bugalhos. Acho que vc vai se interessar pois tem muito a ver com o que vc escreveu.

Abraços
Vera