Yet-more evidence that Brazil’s credit cycle is strongly correlated with global commodity prices and subsequently strong capital flows - at a potential cost down the road. Via Capital Economics:
| Having shown signs of slowing in the second half of last year, Brazilian credit growth appears to have picked up again in recent months. But while this should give a boost to overall GDP growth in the first quarter of this year, the bigger picture is that the pace of lending growth seen over the past couple of years has been unsustainable. A further rapid expansion in bank lending from here on would be a major concern and is something that merits close attention over the next 6-12m. |
Ah, this is so H1 2011, go on:
| The latest data suggest that the slowdown in bank lending seen in Q3 and in early Q4 was a temporary blip, rather than the start of a downturn in the Brazilian credit cycle. Our calculations suggest that lending rose by around 1.5% on the month in November and by 2.0% on the month in December – similar to the pace of growth seen over the first half of 2011. |
So capital flows + Europe not yet collapsing + high commodity prices = Brazil credit boom. What's the problem?
| Yet beyond this we have serious concerns about whether a continued rapid expansion of credit is sustainable – or, indeed, desirable. ... the cost of servicing this debt has increased markedly. Our calculations suggest that interest payments on debt now eat up around 15-20% of households’ disposable income. Despite the relative health of the labour market, the number of new loan defaults per month is at a historically high level (although the rate of increase has at least levelled off). Finally, there is mounting evidence that rapid credit growth is contributing to the inflation of asset price bubbles, especially in housing. |
So time to massively short Brazilian assets? Well, not so fast:
| The time horizon over which all of this might play out is unclear, not least because much will depend on the strength of capital flows to Brazil (and thus the strength of global risk appetite). We are certainly not predicting an imminent financial crisis in Brazil. But the longer the party continues, the bigger the hangover will be. In this respect, the recent pick-up in lending is not necessarily all good news. |
Brazilian credit bubble fears have snowballed in recent years. But expansion has been relatively steady with credit to GDP rising from 24.7% in January 2005 to 50% currently.
What's more, Brazil is well-placed to withstand the impact of a cyclical drop in credit growth. Its banking system is relatively well-capitalized and financial institutions generally dish out vanilla loans rather complex colleraterized debt instruments. And high lending rates have reduced mass-market lending, which typically represents a large (contingent) liability on financial and public sector balance sheets.
Addressing the issue in July 2011, Nomura analysts were bullish on the question of whether there were is a Brazilian credit bubble:
| We believe the answer is no, exactly because of the reason that worries some analysts: Brazil's sky high lending rates. For a credit bubble to occur, credit must be both widely available and cheap. Second, the small size of the collateralized lending market in Brazil means there is only a weak link between asset and credit markets, another key ingredient in any credit bubble. [Also] much of the new credit growth is taking place in the subsidized corporate loan market, which generates different policy questions of their own in terms of contingent liabilities, and not consumer credit. |
That's not to say that some Brazilian banks' profits won't receive a bloody nose in the event loan growth dips or that pockets of financial leverage/distortion won't be revealed. But although credit growth might prove unsustainable, the fallout is unlikely to trigger a cost-of-capital shock or a systemic banking risk. Instead, a reduction in credit growth would reduce domestic consumption and dent headline GDP figures, throwing into sharp relief the economy’s over-dependence on consumption rather than manufacturing and exports.
What also probably explains perennial concerns over the sustainability of Brazil’s credit boom is the region’s historic boom and bust cycle, the cyclical nature of terms of trade shocks given the volatility of commodity prices, and the ongoing fallout from credit bubbles in developed markets, more generally.