Brazil's Challenges #2: The End of Easy Credit

Over the last decade, consumer credit has exploded in Brazil. The stabilization of the economy in the 1990's included a precipitous fall in inflation, which allowed consumers and firms to start thinking a bit more long-term: banks, companies and the government have been looking for ways to make up for lost time and lost consumption ever since. One result has been a huge rise in credit. This chart shows the absolute since 2002, taken from the Central Bank - the total 2002-2011 nominal growth was 438%.



The strong credit growth, which has been from 10% to 30% for every year shown here, has stirred plenty of debate about the health of Brazil's economy, especially in the middle of 2011. The blog brazilianbubble.com shares news daily to support its position that the Brazilian economy is headed for a disaster. Major publications like the Financial Times, the Wall Street Journal and BusinessWeek have questioned the ability of Brazilian consumers to manage this debt, and praised strong credit growth as an indicator of economic strength (and the blog beyondbrics refers to the debate here). The layman can be forgiven for not being certain what to conclude, and we can expect public opinion to keep changing by the month.

But whether a bubble is on its way to bursting or not, it is certainly the case that these scintillating growth rates in credit can't go on forever. As of 2010, the World Bank has credit at 57% of the Brazilian economy, about double what it was in 2002. Of course, this is far from outrageous, as the world average is over 100%. But for lower-middle income countries, Brazil is above average, and given new concerns about inflation eating into disposable income in the country, its questionable whether Brazilians can afford serious continued growth in the cost of paying down debt.

No one doubts that credit has played a crucial role in Brazil's recent economic success. Brazil's leaders have defined their strategy as appealing to the "internal market" and developing consumption as an alternative to export-led growth. Consumption has become so crucial as an economic and political tool that a Brazilian political scientist has even attributed voting patterns to which candidate allows them to increase consumption the most. Almost everything, from a semester of English classes to a new stereo is paid in monthly installments - to the point where the displayed price is almost never what you pay up front. Consumers that don't want to pay interest rates (though most Brazilian consumers have falling for the trick of presenting up-front payment as a "discount" rather than avoiding interest) have to ask for the price "a vista". Consumption and credit are fully intertwined in the Brazilian economy.

Though credit growth is slowing, it should still continue to be significant. The Brazilian Central Bank expects growth of 15% in 2012, down from 18% in 2011. In the mid to long-term, responsible credit growth will only become more difficult as the market saturates.

What will replace credit as a major driver of economic growth in Brazil? It's possible that a coming oil economy will step in to fill the gap, or that the country will finally turn to real productivity gains down the line. But we should expect the low-hanging fruit credit has provided for the last decade to be exhausted soon enough, and a more arduous growth strategy based on investment and productivity to be necessary.