A lot has been discussed about the high debt-service ratio of households in Brazil, especially in 2011, considering it has increased substantially. Early this year, hedge fund manager Paul Marshall wrote an article raising the flag on the issue, warning that Brazil could be headed for “subprime crisis”. We will illustrate some of these points here and compare the Brazilian rates to other countries.
According to the Central Bank of Brazil, the percentage of available household income committed to debt service remained around 20% from year-end 2008 to year-end 2010. This percentage rose from 19.9% in January 2011 to an estimated 22.5% in October. See the graphic below (courtesy of Credit Suisse).
Paul Marshall wrote the following in his February 2011 article:
For consumers (in Brazil) specifically, the ramifications are serious as the debt service burden has risen to 24 per cent of disposable income and is set to rise further as rates push higher (actually they have been lowered). We expect the burden to rise to an exorbitant 30 per cent by 2012. To put this into context, the US consumer “blew up” when the debt service burden hit 14 per cent (with a current read of approximately 12 per cent). In other words, the Brazilian consumer has twice the debt load from a cash flow perspective relative to a US consumer who is still widely regarded as being over leveraged.”

Now the household debt-to-income ratio in Brazil is around 22%, twice as high as the 11% ratio seen in the USA, Euro Area, and Chile (see chart above). The high debt-service ratio in Brazil is mainly due to the high interest rate and the average tenor of loans, which is still low.

Nomura’s Tony Volpon recently wrote that the current high debt burden means that any negative unexpected shock to credit availability or income growth could, as consumers raise savings to pay back debt, add an important downward driver to growth. The consequences of its rising consumer debt burden could still be severely negative for future growth.

From a macro standpoint, says Paul Marshall, a low savings rate and an overvalued currency are putting pressure on growth rates and on the competitive position of the Brazilianeconomy – hence the drive to push leverage (consumer credit? real estate mortgage?) into the system in order to prop up growth rates in line with Bric peers. But the reality is that countries like China and India have been more successful in driving rapid growth rates while retaining high savings rates and more competitive currencies. The issue for Brazil is that the country needs to re-balance towards higher ratios of savings and investment. The consumer spending alone will not solve its problems. The government seems to be aware of what they need to do, but many doubt they will succeed in this world economic crisis.

Hence, expect consumer delinquency rates to stay high in 2012, and banking provisions to increase as the economy slows down. 

Will the high consumer debt be the pin that bursts the housing bubble? Only time will tell.

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