Brazil's Credit Bubble

As I've written about recently, the international press has been murmuring about the possibility of a credit bubble in Brazil. While some local economists have brushed off the idea, citing high real interest rates and a consumer lending as a low share of total GDP, amongst other reasons, other observers continue to worry.

The Financial Times has written extensively about the possibility of a credit bubble, and today continued the warning:

"...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)."

Brazilian credit: big threat to growth, Beyond Brics

More Financial Times credit bubble stories here (related reading)

In another news report, there were worrying numbers showing rises in consumer prices and the 2011 inflation forecast.

"Consumer prices rose 6.71 percent in June from a year ago, led by increases in food and fuel costs. Consumer prices rose 0.15 percent in June from May, while service prices rose 0.67 percent. Commodities prices rose 31.65 percent in June from a year ago, according to an index published by the central bank. The government targets inflation of 4.5 percent, plus or minus two percentage points."

Brazil Economists Boost 2011 Inflation Forecast for First Time in 10 Weeks, Bloomberg

In the TIME story I mentioned earlier this week, there was lots of talk about skyrocketing prices:

"Hotel rooms in Rio de Janeiro cost more than in the south of France. Restaurants in São Paulo are pricier than in Paris. Bellinis are cheaper in Venice. Apartments in the chic Leblon area of Rio sell for more than Fifth Avenue co-ops with views of Central Park. But often there is something amiss when a middle-income country has such a rich currency. The real's gross overvaluation is a symptom of a seriously imbalanced economy."

Brazil: The Un-China, TIME

Speaking of skyrocketing prices, the big story today was about the new Mercer cost of living ratings for 2011. Because of the astronomical rise in prices, São Paulo is now the 10th most expensive city in the world, followed by Rio de Janeiro as the world's 12th most expensive city. The two cities leapt to the top of the list, since São Paulo was in 21st place last year, and Rio in 29th. After moving up 11 and 17 places, respectively, they're currently the two most expensive cities in the hemisphere. It's not just the usual suspects in terms of inflated prices, like technology or gas - the ratings encompass "housing, transport, food, clothing, household goods and entertainment."

Between inflation and the strong real, these types of stories are a daily occurence. Just yesterday, there was this FT article about São Paulo's warehouse boom, describing that the city's warehouse space "cost an average of R$23.50 per square metre a month to rent in the first quarter of this year, the fourth most expensive in the world after Tokyo, Zurich and Hong Kong." It also mentioned that real estate prices in Brazil's largest cities are absurdly high -- since 2008, residential real estate prices in Rio rose 99 percent, and rose 81 percent in São Paulo.

But the high prices haven't stopped consumers from spending. Retail sales were higher than expected in May, a 6 percent rise from the same period last year. But a lot of that spending is on credit, as this Reuters article explains:

"Credit-related segments presented the biggest increases in May from the prior month, indicating that Brazilians are ignoring higher interest rates and taking on loans for their purchases."

But as consumers spend more on credit, more consumers go into debt:

"Outstanding loans have doubled to about half of Brazil's gross domestic product since 2003, according to central bank data."

Credit card debt is in fact on the rise in Brazil, detailed in this AP article that came out this week.The numbers are striking. As I've written about previously, credit card interest rates in Brazil are obscenely high; according to the article, credit card interest rates in São Paulo are an average of 238 percent (compare this to what are being described as "soaring" credit card interest rates in the US, at just 15 percent). And then there's debt:

"By the end of the year, the Central Bank expects 28 percent of Brazilians' disposable income will go toward servicing debt, compared with 16 percent in the United States and less than 10 percent in other developing nations."

This week, Serasa Experian released a report showing that in the first two quarters of 2011, defaults increased 22 percent from the same period the year before, hitting a nine-year high. Economists pointed to inflation-control monetary policies, high interest rates, taxes, and more expensive credit as the culprits. They also said there was a need to change the way lenders evaluate risk.

Finally, in a report that went under the radar, a study found that the average Brazilian's purchasing power barely changed from 1995 to 2009. For Brazilians who earn and buy in reais, the average monthly salaries adjusted for inflation stayed at around R$1,110 over the 14 year period. Plus, the study found that the price of goods and services during the beginning of the Real Plan period, when the real was pegged to the dollar, were cheaper than they are now. The cost of a cesta básica in June 1994 was US$67, compared to US$167 in May 2011.

I'm not an economist, so it's difficult to make a prediction about a credit bubble. But given the culture of savings is not particularly strong in the new middle class, and the rampant spending that these new consumers are doing, it seems likely that there will be a slowdown at least in terms of consumption sometime in the foreseeable future. There are plenty of preventative measures, like ensuring legislation to protect against predatory lending, or public service campaigns to teach first-time credit card holders about credit. But who wants to spoil the party? Ultimately, bubble or no bubble, the consumers are going to be on the losing end. And when those consumers are your family, friends, colleagues, or you, it's worth paying attention.

Comments

[Rodolfo Araújo]

Just wrote about it too. Hope you like it! http://www.naopossoevitar.com.br/2011/06/bolha-que-estoura-la-estoura-ca.html

Best regards, Rodolfo.

[eric]

FT:"Shearing admits (as Attuch argues) that estimates of the debt service burden may be exaggerated, especially given the size of informal economy".
That´s true, never underestimate the power of the informal economy in Brazil. Specially when you look away from the corporative environment, people tend to keep their money far from the government teeths.
That doesn´t mean everything is going to be like it has being till now.
At one point, there won´t be enough income to keep the pace. Unemployment will raise among the poor, the end of the predatory chain. The new middle class will find out what middle class life is really about.
They fall in love with capitalism, now they will learn how it works better, for their first time.
But I don´t believe in a bubble crisis. I believe is going to look more like an old rollercoaster, with smaller growth in years to come, steady growth.
Financial news here are worried about the States, its all they talk about these days, no bubble talk here.

[Rio Gringa]

Rodolfo, seu blog é muito interessante - muito obrigada por compartilhar!

[RFS]

Is there a reason for my post not to have been acceted?

[Rio Gringa]

RFS - I never received a comment from you. I checked the spam folder and it's not there either. But thanks for the insults before bothering to check, that was nice.

[RFS]

I doubt you didn't receive anything. As I said before, it's not the first time I've had a comment censored, and going from the history of this blog, you seem to have a habit of deleting comments that do not toe your party line.

My deleted comment was way too long - as it had many points regarding this issue - for me to be in the mood to repeat it any time soon.

Be that as it may, you have to be hypersensitive to consider as an insult my calling your "analyses" superficial. But then again, the history of this blog proves you like to portray yourself as persecuted for telling things how they are.

Please, do not censor my post this time. Seja mulher e encare discordâncias quando elas aparecem.

[RFS]

By the way, if you're going to accuse me of insulting you, you better approve the "insulting" message so other posters can judge by themselves. It's extremely cowardly to do as you did above. You have been blogging for what? 4 years now? And you don't even know that?

[Rio Gringa]

RFS - I did not receive your comment. This is the last time I'm going to address this. If you remember what you wrote, feel free to repost it and I'll publish it.

Also, if you need a refresher on my comment guidelines in reference to your comment I did not in fact publish, that had nothing to do with the post and was simply accusing me of something I didn't do, please refer to my comment policy: http://riogringa.typepad.com/my_weblog/faq-comment-policy.html I even updated it for you (see #1)

However, if you continue with comments like your last one, which are false accusations and things I consider insulting, I will not post them. Again, if you want to resend your original comment with reference to the actual post, feel free.

[RFS]

It was a long post. But this may suffice:

- the Estadão link is comparing income variation in dollars. So of course the Brazilian income would have seemed larger back in the 90s when the real was pegged in parity with the dollar. Similarly, under an INTERNATIONAL perspective Brazil may have seemed quite a more expensive place in 2007 than in 2006, since from 2007 onwards the real has become an increasingly expensive currency. For those living inside the country, however, such variation doesn't exist. In fact, the country may seem less expensive as Brazil's per capita income in purchasing power terms has increased since then. So there - that is why São Paulo and Rio look so much more expensive now than in a short while ago. This leads to the housing market issue. The Economist noticed some months ago that South American bigger cities are becoming increasingly expensive. It did argue that this had little to do with asset bubbles or rising indebtedness but instead with a richer consumer. I don't remember all of the points the author drew as I didn't read all the piece, but I do remember it pointed out that the number of Brazilians earning more than 10 minimum wages had grown by quite a bit during the last decade. It should be remembered that the housing market represents a small part of the Brazilian economy, and mortgage and related sorts of credit are yet 5% of total GDP. The housing market seems to be in its infancy yet. This is shown by housing vacancy rates in São Paulo and Rio, the so-called ultra-expensive cities, which have remained stable during the last 5 years. Vacancy rates are an indication of the presnce of housing bubbles. When the bubble burst in the US back in 2008, vacancy rates were above 19% in the most affected cities. In China, where there have also been rumours about bubbles, vacancy is at 30%(!) in some parts of the bigger cities. In the main parts of Rio and SP, however, vacancy is yet at 7% of high income properties, with the outlook in SP being one of improvement. http://www.cushwake.com/cwmbs1q11/PDF/brazil_off_1q11.pdf

I find it funny that those arguing for the existence of housing bubbles in Brazil always "forget" to cite vacancy rates, though they always cite it when they are making their Chinese case.

And finally, I have in previous comments adduced links which argue against the existence of credit or housing bubbles. Most of them were from the Financial Times, whose take on the issue is far more nuanced than yours. You, on the other hand, ONLY mention those who argue for your case. It's no wonder that people believe you're biased. Economics is not physics, RioGringa. It may work with math but it studies processes that are less reliably quantifiable than physical ones. Therefore, if you want to get a comprehensive view on an economic issue, you need to consider different perspectives on the issue.

[Micaela]

"No bubble talk here?" No, I must disagree. My fiance is managerial loan officer in the mortgage department of the Bank of Brasil. Everyone is talking about a potential housing bubble. High levels of speculation, low savings rate, overvalued currency...does this sound familiar? It should, because it's almost exactly what happened in the United States.

[RFS]

An overvalued currency has nothing to do with housing bubbles, I don't know why are you aducing it. Low savings rate is a chronic problem in the Brazilian economy, and not the result of current structural difficulties. And in fact, the current savings rate - about 18% of GDP - is still higher than a decade ago (10-14% of GDP), with much of the increase happening in the last 4 years or so. (You can check that at the Data and Statistics section of the IMF webiste.) And I'm sorry, but what your fiancé says means little in face of overall data. No one's first hand experience speaks for that of the whole of the nation, specially one as big as Brazil. So far there's no oversupply of homes in Brazil, as shown in moderate and stable vacancy rates, and as said above, mortgage and related kinds of debt are still a very small part of the BR economy.

[Micaela]

I was addressing solely you comment that there is "no bubble talk here." As you said, "no one's first hand experience speaks for that of the whole nation", yours included. So, according to you, there is no bubble talk, but somehow when I suggest that there is, my anecdote is fallacious and unrepresentative and yours is not. Surely someone who has worked in the housing market for a decade, like my fiance, has no clue what he is talking about. Furthermore, all the causalities cited above are things I have heard, first hand, here in Brazil, as reasons cited for a possible housing bubble. But again, there's no bubble talk here! So I must be delusional.

[Marcio Bernardo]

The thing about economic bubbles is that it is really hard to known you are in a bubble while things are going ok... you never really know untill it burst, there are always people saying the economic growth isn't sustainable etc

Noriel Roubini have written about the Euro zone demize for years now and Meredith Whitney how did call the wall street meltdown and the recession misssed the mark on Municipals defaul predictions...

But you really can't compare the US crise(S) and recession with Brazil, because US had two separate crisis, the mortgage/subprime crises and them the credit crises, The credit crises where due to the commoditization and complex derivations of mortgage loans... this does not happen in Brazil, since 1995 Proer our banks has a goood balance sheet and not much leverage nor much exposure to mortgage derivatives so the effects of a housing bubble busting and mortgage crises shouldn't be as severe to the rest of the economy as it was to the US because it should lead to a credit crises

Now, the the Brazilian Real strengh is very worrysome because it could cause (be a sign of) the "dutch disease" where you see a rapid expansion of exportable natural resource and decline of the manufactorind sector...

http://en.wikipedia.org/wiki/Dutch_disease

But so far the Brazilian Goverment is keeping an eye on this amd our Banking sector is very regulated, which wasn't the case in the US since the Glass-Steagall act and Greenspan's belief that the system should police itself...

[Henrique Ramos]

I can only guess what Brazil government is doing is try to break inflation with the only tools they have: interest rates and strong real. Unlike in 1999, when Brazil went broke, now the super-valued Real is actually floating. However, its position is not real. It is mainly caused by the amount of foreign money in Brazil. This money is only here to profit on high interest. Whenever USA raises its rates, part of it naturally comes back and, in consequence, devalues Real. The government is not trying to stop Real from gaining value because it is a bonus on their fight against inflation. My hypothesis is that the "buble" from elsewhere is affecting us. Or we live something opposed to "buble". Apparently, Brazil has to always be the weird one when it comes to economics. The big unbalance is probably coming from China and US themselves, but foreign analysts are more comfortable to describe everything as a buble, it seems.

[eric]

I´d bet foreign analysts loved to play with bubbles when they were babies at their bathtubs..They miss that badly...

[Rodolfo Araújo]

My pleasure!

Best regards, Rodolfo.