Brazil’s debt binge

While the Western world continues to grapple with the hangover from its credit binge, “emerging markets have looked relatively sober by comparison”, says the FT. “But there are worrying signs that they too have begun to overindulge.” The credit booms have taken place in the private sector.

The latest data show private-sector credit growing at annualised rates of 20% or more in Colombia, Indonesia, Turkey and Russia, for instance. China’s housing and credit bubble appears to be coming to a sticky end, and Brazil is flashing red.

Brazilian private-sector credit growth has exploded in recent years. Five years ago it was worth 25% of GDP; now it accounts for just over 50%, says Capital Economics. Debt servicing now consumes around 20% of household income, up from under 10% in 2005, according to the Bank for International Settlements.

Having gorged themselves in recent years, consumers are starting to feel queasy. Default rates are on the rise and hit an all-time high in May, yet unemployment is still at a record low. May’s retail sales, moreover, were “simply a disaster”, says Andre Perfeito of Gradual Investimentos. They fell at their fastest rate since the depths of the global financial crisis in 2008.

All this easy money has blown up a housing bubble too, says Capital Economics. House prices are overvalued by at least 30%. Brazil’s Western-style credit bubble seems to be hissing air just as China’s demand for commodities falters, which is set to undermine exports. A nasty hangover seems likely.

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