Debate on the vulnerabilities that could condition the Brazilian economy mid term
The good performance of the Brazilian economy and its management of the 2008 world financial crisis have been headlines across the world, but there are also some warning signals form analysts regarding the possibility of asset bubbles and their consequences.
“People are underestimating the problems of the Brazilian economy”, warns UK’s Capital Economics senior analyst for emerging markets, Neil Shearing. “Basically the rate and nature of Brazilian growth are not sustainable”.
Some of the vulnerabilities on which analysts agree include the expansion of credit at high interest rates, the appreciation of the currency, risks of inflation, the strong price for commodities and bloated real estate values in Brazil’s major cities.
“If the credit bubble goes off, it could be quite impressive and would force a strong slowing of the economy” warns Amit Rajpal from the Marshall Wace investment fund in Hong Kong.
In an article published this week in the Financial Times, Rajpal and Paul Marshall warn of a crisis in the credit sector given the increasing percentage of income that Brazilian families must leave aside for debt payment, and prospects for that percentage to increase, as rates continue to be hiked.
“The weight of credit in families cash flow is astronomical and keeps increasing” they point out.
Capital Economics also indicates to difficulties in Brazilian industry in spite of a recent surge in production. “The over valued Real continues to distort the Brazilian economy”.
Although short term prospects remain positive Capital Economics warns about the sustained capital inflow into Brazil and the quick pace at which consumer credit is expanding. These could lead to an overheating of the economy and the creation of dangerous assets bubbles.
Capital Economics also points out that excess liquidity and strong current account surpluses in countries such as China and Germany will remain for some time which means heavy inflows of capital to emerging economies, such as Brazil, basically because the surplus capital in those countries will be looking for more profitable investments with higher interest rates.
The report warns that the capital inflow is being used to promote domestic consumption, supported by abundant credit that finally fuels inflation, instead of investing in production capacity.
Furthermore Capital Economics believes that in spite of government efforts to address the above mentioned issues; “challenges could finally prove to be even greater”.
Neil Shearing forecasts that asset bubbles should begin bursting in 2013, “but not to the point of forcing a recession”. The analysts estimate that the Brazilian economy will expand between 2% and 3% in 2013, which could be considered “fantastic” for developed countries but insufficient for Brazil that must grow 3% to 4% to compensate the population increase and generate sufficient jobs.
However Amit Rajpal anticipates a steeper fallout but conditioned to how serious the private credit bubble expansion is. “The Brazilian government failed in adopting quick measures to contain the inflow of capital, in promoting families’ savings and containing government expenditure”, says Rajpal.
Furthermore the measures implemented by the Brazilian government to contain consumer credit “are very limited in scope” and credit continues to expand at a much faster rate, “and need to be container”.
Rajpal goes further and says that some measures such as increasing interest rates have the immediate effect of increasing the weight of servicing debts. According to data compiled the average interest rate for consumer credit has gone up from 41% last year to 47% in 2011, which means families must leave aside not 24% but 28% of their disposable income to service debts. (In some middle class areas such a percentage has hovered over 50%).
In the US the percentage of families’ disposable income to pay debts amounts to 16% while in emerging economies is much lower, India, 4.8% and China, 6.5%. Not only that but in the first five months of 2011, over-15 days delay in returning credit has risen from 7.8% to 9.1% of total loans.
Rajpal and Marshall point out that the 10% fallback in the Bovespa index from Sao Paulo’s stock exchange since the beginning of the year is an indication that investors are beginning to be concerned about the future health of the Brazilian economy.
The two economists add that analysts and investors have a positive attitude towards the Brazilian economy but also indicate that ‘uncertainties’ and conflicting points of view must be addressed before the end of the year.
Last May the IMF warned the Brazilian economy on overheating risks, but also praised the package of measures implemented by the government to cut costs and reduce the number of loans granted by the BNDES (Development bank usually at rates below market).
But in spite of the growing signals of alert about the Brazilian economy, other analysts remain positive and discard asset bubbles.
John Williamson from the Institute for International Economics in Washington argues that there are no signs of asset bubbles, but admits that the main challenge for the Brazilian economy is the excess value of the Real, and the government is implementing the correct approach.
Simon Knapp from Oxford Economics says the increase of credit in Brazil should not worry and sees no signs of asset bubbles. “In spite of strong growth, the level of debt in Brazil is still modest, in the range of 50% of GDP, while in the US and the main European countries “it’s three times as high”.