For the professor of the Economics School at the Getúlio Vargas Foundation (FGV) in São Paulo, Samy Dana, productivity and domestic economic activity are more responsive to monetary policy measures when consumers are less indebted. He is commenting on recent data showing that Brazilian payment default rates and family indebtedness are at record levels.
“The response would be more pronounced if consumer indebtedness was not as high as it is at the moment,” says Dana, who goes on to point out that trying to boost consumption in these circumstances in order to stimulate economic expansion will be a very hard slog.
“This is the model that has been used a couple of times since the crisis began in 2008,’ he says. “But it is just not possible to expect the same result three or four years later because in many cases people have consumed all they can and in some cases even more than they can.”
According to Dana, high levels of payment delinquency have collateral effects especially in an environment where people are not economically savvy.
“The consumer thinks only of the size of the installment payment he has to make every month, not the interest or other surcharges that are embedded in the purchase. Many people who finance a car pay for two cars by the time they have paid off the bill,” he points out.
Another expert, the vice president of the National Association of Financial Executives (“Anefac”), Miguel de Oliveira, has a very different opinion of indebtedness, payment default rates and the credit market.
Very different from the opinions of former Central Bank director, Carlos Eduardo de Freitas, or academic, Samy Dana, of the Getúlio Vargas Foundation. Oliveira says he believes that growth will be sparked as payment default rates fall and credit lines continue to expand.
“A very large segment of the population is still outside the credit market. As long as we are creating jobs and income is rising the tendency is for payment delinquency to fall,” says Oliveira. But, he adds a caveat: what he said is true as long as the international crisis does not get worse.
As for domestic financial institution interest rates, Oliveira says banks are doing their part by factoring in Selic reductions. But the problems, he says, is that fully 29% of the bank spread is due to payment delinquency.
Payment default rates are at historic highs just as the country goes through a significant cycle of low interest rates.
At the end of this August, following a year-long series of reductions that began in August 2011, the Central Bank’s Monetary Policy Committee (Copom) lowered the benchmark interest rate, the Selic, to 7.5%, the lowest ever.
At the same time, payment delinquency hit a historical high. According to Central Bank data, loans that are over 90 days late reached 5.9% in July, the highest since records began in 2002. If only personal loans are considered (as opposed to corporate loans) the rate rises to 7.9%.
“The government has unblocked the path to credit and more consumption but few families are taking advantage of the lower interest rates because their budgets are stretched to the limit,” says Carlos Eduardo de Freitas, a former Central Bank board member.
Freitas says that Brazilian families spend an average of 43% of annual income on installment buying, which is actually low compared to some developed nations where it can be over 100%.
What weighs the Brazilian family budget down are taxes and charges the gobble up 22% of income, and that is really high even though official interest rates have fallen for the last twelve months.
“Family debt is not that high, but servicing it is burdensome, especially for this kind of debt profile; that is, short term debts with high interest rates,” says Freitas.
“It is not the size of family debt that is the problem, but service charges on it,” explains Freitas.
In July credit operation charges also reached a historical high of 36.2% per year. Other lines of credit, such as overdrawn checking accounts, had even higher interest rates.