Brazilian debt fuelled consumption is slowing as defaults inch upwards.

BY JOHN PRICE AND LINDSAY LEHR

Thanks to a decade of impressive economic growth, high com­modity prices, generally sensible macroeconomic governance and redistributive wealth policies, Latin America’s middle class is larger and better off than ever. Coupled with low interest rates, these conditions have created a credit boom in the region, with banks and retailers bending over backwards to get money into the hands of the middle class.

As a result, from 2010-2013, tele­vision sets, home appliances, electronics and furniture found their way into many Latin American households for the first time, and new cars, home renovations, and vacations became reality for many Latin American families. As commodity prices have waned, domestic growth has relied increasingly on con­sumer debt with private consumption accounting for well more than 50 percent of GDP in Brazil, Mexico, Chile, Colombia, Argentina and Peru.

INTEREST FREE

A key facilitator of the consumption growth is the use of interest free installment plans, issued in conjunction by banks and retailers. A $500 flat screen television that was once only a fantasy for a middle income family is now well within reach, payable in 24 payments of $30 USD. This trend is most evident in Brazil where installment payments were first introduced to retailers by the card industry over a decade ago; from 2009 to 2013, consumer loans jumped from $300 to $600 billion, and in 2012, more purchases were made using installment plans ($113 billion) than without ($108 billion) for the first time. This retail frenzy has reached such heights that in 2013, nearly 25 percent of Brazilian household income was dedicated to servicing debt, and 60 percent of Brazilian households have made an installment payment at a retailer.

But Brazilian debt fuelled consumption is slowing as defaults inch upwards, and both banks and retailers reign in their loose lending practices. In 2013, Brazilian private consumption fell by 2.2 percent, as Brazilians began to pay down painful debt levels, curbing their spending. By the end of 2013, 5 percent of Brazilian consumer loans were 90 days overdue.

Macroeconomic factors are exacerbating the consumption slowdown. Falling commodity prices and over-spending by both consumers and government have weakened the Real, sparked higher inflation, and triggered the Central Bank to raise interest rates. That drives up the cost to households of servicing debt, further curbing the appetite for new spending. Most economists anticipate low growth and high inflation in Brazil through the end of 2016, until such time that households and the government can put their fiscal houses in order.

John Price is the managing director of Americas Market Intelligence and a 22-year veteran of Latin American competitive intelligence and strategy consulting. jprice@americasmi.com. Lindsay Lehr is a director at Americas Market Intelligence.