Brazil’s credit-driven consumer boom hits a limit
By Howard Schneider,
SAO PAULO, Brazil — By early November, the retailers along bustling Doze Outubro street were in full holiday mode. Balloons and streamers bedecked a newly opened branch of the Magazine Luiza department store, a deep-voiced salesman boomed offers of easy credit through a sidewalk sound system, and store banners summed up the mood of a consumption-crazy nation:
“Come, and be happy.”
For more than a decade, a credit-driven consumption boom has helped fuel economic growth here, expanding the country’s middle class and adding to the success Brazil had already enjoyed through its commodity and agricultural sales. Now, there are signs that that model is fraying, and with it the optimism that the world’s main emerging markets would become permanent props for global economic growth.
After helping pull the world from the depths of recession following the financial crisis of 2008, the so-called BRICS — Brazil, Russia, India, China and South Africa — have lost some of their sheen. The story is different in each nation, but many analysts have soured on the notion that emerging nations can steer the world to recovery on its own.
In a recent Foreign Affairs article titled “Broken BRICs,” Ruchir Sharma, head of emerging market equities at Morgan Stanley, wrote that coming years “will be defined by moderate growth in the developing world” and “the return of the boom-bust cycle” that has kept many emerging economies from joining the richer class of developed nations.
The path of countries such as Brazil will be important to the fate of the U.S. economy. Stalled growth in the world’s sixth-largest market could mean fewer exports for some U.S. firms and less investment potential for others. Arguments in favor of more-open world trade, meanwhile, are often rooted in the expectation that an expanding middle class in nations such as Brazil would ultimately benefit U.S. companies. But if those countries lose momentum — or become stuck in a “middle-income trap” of limited future progress — that hoped-for dynamic may disappoint.
When Brazil’s economy unexpectedly slowed this year, the government acknowledged that it needed to shift gears and steer more of the country’s resources toward investment — fixing the country’s long-standing infrastructure problems, improving manufacturing efficiency and taking other steps to become more globally competitive.
Brazil accomplished an impressive feat over the past decade in moving at least 30 million people out of poverty and into the middle class. The country’s per capita income is now nearly $13,000 annually, and income distribution has become more even.
Boosted by commodity wealth and aggressive social welfare and minimum-wage policies, growth was further magnified by loose credit and a live-now, pay-later culture that fueled retail trade and expanded jobs in services. Compared with Asian nations, where families are notorious savers who stash away money for old age, it is estimated that 80 percent of Brazil’s gross domestic product is tied to consumption — higher than in the world’s most-developed economies.
On main shopping streets like Doze Outubro, the party shows no signs of slowing down. Almost anything — from major home appliances to Barbie Pop Star — can be purchased on in-store installment plans. The financing costs are steep: A $1,000 television costs about $1,975 once the 23 monthly payments are made; a $48 toy costs nearly $54 once the five installments of $10.78 are paid. Credit cards from Brazilian banks charge interest of as much as 10 percent monthly — the equivalent of more than 200 percent a year.
‘The customer’s choice’
It has become the norm, said Nil Luiz da Silva, a manager at a branch of the Casas Bahia retail chain, for consumers to ignore the finance charges and simply estimate whether they can afford the monthly payments. The installment purchases take only a few minutes to approve, requiring a quick ID check through a central credit registry.
“It’s the customer’s choice” whether to pay cash or use the store installment plan, said da Silva, who estimates that he spends half his take-home pay to service a mortgage and other debts. His latest installment purchase: a $2,000 3-D television.
“In Brazil we have debt, but we still go to Carnival,” he said.
The system has arguably helped families furnish apartments and stock up on household goods and gadgets. But nationwide, the bills are starting to add up.
Bad loans in the banking system have been increasing, and debt service now consumes nearly 23 percent of household disposable income — higher than in the United States and far beyond Brazil’s Latin American neighbors, according to the most recent review of Brazil’s economy by the International Monetary Fund.
The overall level of credit in the country remains comparatively low, equivalent to about 50 percent of the value of the country’s annual economic output. But it has doubled in seven years, a rate of growth that the IMF said in a July report has been linked in other countries to the eventual onset of financial crises.
The country has taken steps, including using the large state-owned banks to issue lower-rate credit cards in hopes that people can continue buying without running into trouble.
Counseling for ‘superindebted’
But there’s a growing recognition that the credit boom has taken a toll. Procon, the Sao Paulo region’s consumer protection agency, recently began counseling sessions for what are termed the “superindebted” — people who have run up such high consumer credit bills that they cannot make the payments and meet other basic expenses.
At one recent session, a finance professor and consumer psychologist explained the common mistakes — looking at the monthly installment price of a hair dryer or other appliance, for example, without calculating the total amount required to pay for it over time.
Fatima Gomes de Melo, a divorced mother of two, said she had stayed away from credit cards until 2008. Since then she has accumulated a small satchel’s worth — more than two dozen bank cards, gas cards, in-house store cards and others. She earns about $700 a month at her job in a flower shop and owes about $400 on her monthly debt payments.
Credit counselors at Procon try to work out payment or forbearance plans with banks, but they say the process is hindered by a lack of strong consumer laws. There are no usury regulations to limit interest rates, for example, and no personal bankruptcy rules.
“I believed in this dream” that credit was the way to enjoy the fruits of Brazil’s progress toward middle-income status, Gomes said. She ran through her savings after her divorce a decade ago but kept spending long after.
“I said I’ll buy beautiful clothes and get a rich husband to pay the bills,” said Gomes, who also helped her sons buy vehicles and other major items on credit. “It didn’t happen.”