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DE RUEHSO #0832/01 2841924
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P 111924Z OCT 07
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UNCLAS SECTION 01 OF 03 SAO PAULO 000832 
 
SIPDIS 
 
SIPDIS 
STATE FOR WHA/BSC, WHA/EPSC 
STATE PASS USTR FOR KATE DUCKWORTH 
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON BR
SUBJECT: CREDIT GROWTH IN BRAZIL DRIVING ECONOMIC GROWTH 
 
REF: SAO PAULO 709 
 
Summary 
------- 
 
¶1.  (U) Credit growth in Brazil is one of the major drivers of 
economic growth despite some of the highest real interest rates in 
the world.  Overall credit availability is up 25 percent over the 
last 12 months, especially in personal consumer credit and much of 
this growth is attributed to rising incomes and business confidence. 
 New forms of credit are also bringing traditionally excluded lower 
income Brazilians into the credit market; however, this sector 
represents a significant risk of default.  As the regulatory 
framework in Brazil doesn't adequately protect banks against these 
default risks, the result is higher interest rates.  Overall, 
economic analysts in Sao Paulo view Brazil's credit expansion as 
positive; however, Brazil needs to strengthen the ability of banks 
to review and share an applicant's credit history and credit checks 
to ensure credit expansion remains a positive economic tool.  End 
Summary. 
 
Brazil's Credit Booming, But Still Relatively Small 
--------------------------------------------- ------ 
 
¶2.  (U) Credit growth in Brazil is expanding quickly despite the 
recent sub-prime credit turmoil in the U.S. (reftel).  The Central 
Bank's (CB) August bank lending data shows that Brazil's overall 
credit volume has expanded by 25 percent over the last 12 months. 
Total lending as a percent of GDP in Brazil was 33 percent in 2007, 
up 10 percent from January 2004, and the CB forecasts continued 
growth to about 40 percent of GDP by the end of 2009.  However, 
Brazil's share is still small relative to other countries such as 
Malaysia, China, and Thailand where lending as a percent of GDP is 
nearly 100 percent. 
 
¶3.  (U) Brazilians are buying a rising share of goods with credit, 
including cars, clothes, food, small household appliances, 
electronics, and real estate.  Personal credit was responsible for 
40 percent of credit growth in 2007 through August.  Automobile 
leases and real estate mortgages over the last 12 months are up 80 
and 74 percent respectively.   [Note: Mortgages in Brazil only 
represent 1.6 percent of Brazil's overall GDP, compared with 60 
percent of GDP in the U.S.  End Note.]  Retail stores also are 
introducing store-specific credit cards, supplying the market with 
even greater access to credit.  According to Rodrigo Mariano, an 
economist at the Federation of Commerce of Sao Paulo (Fecomercio), 
credit cards represented 42 percent of outstanding debt in August. 
Moreover, the CB reported in September that loan maturities are at a 
six-year high, and that financing costs are declining.  The average 
maturity for consumer loans is about 9 months, and 14 months for 
corporate loans.  [Note: As a small comparison, the average maturity 
for a U.S. new car loan in August was 62 months.  End Note.] 
 
A New Breed of Creditors 
------------------------ 
 
¶4.  (U) Marcelo Carvalho, Chief Economist at Morgan Stanley, told 
Econoff that one of the most noticeable changes in the Brazilian 
economy has been the growth in credit access especially for 
Brazilians of lower income.  New forms of credit, such as 
payroll-linked credit have increased credit opportunities for lower 
income Brazilians.  Payroll-linked credit lines, up 24 percent in 
2007, automatically deduct payment from a paycheck at significantly 
lower interest rates.  The Brazilian government introduced these 
loans in 2004 for government employees and retirees, and their 
interest rates are about half of traditional consumer loans. 
 
Rate Cuts Don't Matter Much for Consumers 
----------------------------------------- 
 
SAO PAULO 00000832  002 OF 003 
 
 
 
¶5.  (U) The SELIC rate is the Brazilian reference interest rate, 
which is the intra-bank lending rate, but more directly determines 
what rate banks charge the government.  Most consumer credit lines 
are not directly indexed to the SELIC rate; however, SELIC rate cuts 
indirectly lower borrowing costs for consumers and corporations. 
While the CB has cut the SELIC by 8.25 percentage points (a 42 
percent drop) to 11.25 percent since September 2005, corporate and 
consumer rates remain high and have fallen by a lesser magnitude. 
The average annual corporate lending rate for August was 23 percent, 
and for consumers about 46 percent, down 30 and 35 percent 
respectively over the same time period. 
 
¶6.  (U) A cut in the SELIC rate does indirectly encourage lending to 
the private sector because banks capture higher profit margins than 
they would lending to the government.  However, the lack of 
competition and underdeveloped regulations in the Brazilian banking 
sector limit consumers' benefits from a rate cut.  Employees often 
are required to use specific banks to receive paychecks, limiting 
incentives to market to individual consumers.  The banking sector is 
highly concentrated, which also restricts competition and lessens 
the effects of a cut. 
 
¶7.  (U) A Brazilian law preventing banks from sharing positive 
personal credit history reports also minimizes consumers' ability to 
switch banks seeking better rates.  A positive credit history would 
increase the information available to lenders, reduce the default 
rate, and lower credit costs, but the Brazilian government has made 
little attempt to address the issue.  Without a traditional credit 
score such as that in the U.S., all borrowers pay a default premium 
and thus interest rates are artificially high. 
 
The Booming Economy the Real Driver 
----------------------------------- 
 
¶8.  (U) Mariano told Econoff that the private sector's expectation 
for economic stability over the short and medium term is helping 
drive both the supply and maturity of consumer credit.  This 
business optimism is due in part to interest rate cuts and is 
driving companies to find strategies to increase local demand for 
their products.  On the demand side, the increase in workers' 
incomes and the creation of credit lines that deduct directly from 
paychecks are propelling consumer credit growth. 
 
Credit Growth Not a Concern Now, But... 
------------------------------------- 
 
¶9.  (U) Generally speaking, credit expansion in Brazil is positive 
and helps to drive domestic economic growth; however, there are 
several long-term concerns.  Ulisses Gamboa, an economist for the 
Commercial Association of Sao Paulo, told Econoff that Brazil's 
regulatory framework for credit checks is weak.  On the retail 
lending side, stores perform basic credit checks before issuing 
credit cards; however, Brazil doesn't have an interstate system for 
checking credit history, so establishments must individually check 
each known state of residence.  Furthermore, Gamboa noted the 
regulatory body absolves a person's bad credit history after 5 
years. 
 
¶10.  (U) The delinquency rate for private consumers in Brazil has 
been fairly stable, approximately 7.2 percent in August.  Overall, 
Brazil's delinquency rate is much lower than its Latin American 
counterparts.  [Note:  According to U.S. Federal Reserve data, the 
U.S. delinquency rate across all consumer loans for the second 
quarter of 2007 was about 3 percent.  End Note.]  Mariano told 
Econoff that the stable delinquency rate is partly due to the 
extended payment timeframes and lower interest rates.  However, 
Fecomercio's monthly survey of consumer indebtedness and delinquency 
(PEIC) in Sao Paulo in August showed that 59 percent of respondents 
 
SAO PAULO 00000832  003 OF 003 
 
 
were indebted, and 22 percent of those indebted are more than 90 
days overdue.  Over the longer term, Mariano is concerned that 
increased indebtedness could imply higher default levels and lead 
banks to restrict new credit availability or raise interest rates 
across the various credit products. 
 
¶11.  (U) The lack of personal finance skills among Brazilians who 
have recently gained access to credit sources as a result of higher 
incomes and financial reforms also is a potential source of concern. 
 According to Mariano, the new profile of Brazilian consumers live 
month-to-month, and don't consider future savings or future income 
streams when making credit purchases.  According to the Fecomercio 
survey, 36 percent said they were behind on payments because of a 
lack of financial control, and another 30 percent because of 
unexpected expenses.  Furthermore, the common practice in Brazil of 
dividing purchases into a series of monthly payments encourages 
bigger and more purchases by postponing liabilities to a future 
date. 
 
¶12.  (U) Despite greater access to cheaper credit, an age-old 
mechanism for covering excessive monthly expenses called the "cheque 
especial" grew considerably.  Banks provide an overdraft credit to 
meet immediate cash needs at much higher interest rates, near double 
the rate of traditional credit lines.  [Note: The average interest 
rate for this line of credit in July was 139 percent.  End Note.] 
Initially, demand for this service declined with cheaper credit 
options, but renewed demand suggests that it has become a last 
resort for people that have exhausted other forms of credit. 
 
Comment 
------- 
 
¶13.  (U) Brazil's credit story reflects the positive business 
climate and indirectly the decline in real interest rates.  Although 
growth has been strongest in relatively low-risk consumer segments 
such as vehicle and payroll loans, there remain risks associated 
with increasing the availability of credit to a new segment of the 
population.  Overall, the total lending as a percent of GDP is low, 
and many economists in Sao Paulo are not concerned about the rapid 
growth of personal credit for the moment.  As with any market 
liberalization, Brazil needs to address the regulatory framework to 
strengthen the Brazilian credit system in order to ensure stability 
in the rate of default and to bring interest rates down.  End 
Comment. 
 
¶14.  (U) This cable has been coordinated with Embassy Brasilia and 
the Financial Attache.