Brazil fact of the day

Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.

Here is more, on the vulnerability of the Brazilian economy.


I remember a Financial Times article that, while talking about some business or another trying to expand into Brazil, off-handedly mentioned that Brazilians like to pay for purchases in installments. Can anyone vouch for that? I'm wondering if there's a cultural element to it.

I can definitely vouch for the fact that Brazilians use installment payments. I have lived there for 14 years, and I have bought several higher priced items in this way.

In the past, when inflation was high, you could get a pretty large discount for paying the full cash price up front. The other option was to write out 12 checks (for a one-year deal). You take the item home with you when you make the first payment, so it is not like lay a way.

Later, they handed out tons of credit cards, so the payments can come off the cards every month. And there is usually no discount anymore for paying up front, but one should always ask -- the price usually comes down by 5%. (In the past this used to be 10-15%.

I hope the difference is that their median incomes are actually rising...

It was very hard to educate my wife in the concept that though I am by no means wealthy, if we really wanted to buy something, we could pay for the whole thing up front, and that it was better from a cash management perspective and sometimes cheaper than paying for it by installments.

On the other hand, from a brief apartment search there, it seems that the concept of paying for a house or apartment almost entirely with debt, with a little money down, is almost unheard of.

This business of buying a house or an apartment with cash is true. I did it myself. The reason is that interest rates on bank loans are extraordinarily high --- just mind-boggling.

I have a low-interest-rate credit card, but I always pay off the entire balance because the interest rate is about 10.5% PER MONTH, NOT PER YEAR.

The US used to be the same way, prior to the Federal Reserve Bank's existence. Banks rarely made residential loans except to their well-known, bestest customers who generally had other collateral besides the house on which to borrow against. The average person either borrowed from the insurance company or a building & loan (either way they were mutual companies and vetted the borrower almost as much as a bank).

What all gets deducted from income to make "disposable" income?

Just taxes.
Discretionary income deducts the generally essential spending in addition to taxes.

Almost all debt in Brazil is structured as monthly fixed rate payments, either it is commercial debt, consumer finance or real estate. Since interest rates are very high (usually over 2.5% per month or 35% per annum), interest charge is a very high portion of debt repayments.

It is rare, difficult and prohibitively expensive to actually roll your debt principal from one month to another (interest rates ranging from 7 to 10% per month for that (125% to 213% per annum). Also most debt is very short term in nature, the average duration must be around 3 to 4 months, maybe even less. As most of the debt is fixed rate, consumption is very sensitive to higher interest rate as items become much more expansive because of higher installments whilst, since few roll their debts anyway, higher interest rate don't really increase debt default rates.

So even though debt payments can seem a large part of household revenues, these are relatively short term commitments manageable even if unemployment was to go up significantly. Finally, a relevant part of the interest charge is caused by government taxes on credit, if default rates were to go up significantly, the government could simply reduce those taxes, reducing the debtors interest charge as has already happened in the past.

The FT journalist doesn't mention any source and frankly I doubt that what he says is close to the truth. Most likely, he's wrong about the number and his "small sample" is limited to middle-income people. In addition, to discuss seriously how much disposable income is used to service debts, among many other things you have to know people's expected inflation and how it can affect both disposable income and debt service.

Much more important than Tyler's quote is the FT journalist's statement that "The Brazilian real is the most overvalued major currency in the world". The short-run problem of Brazil and several other commodity-exporting LA countries is how to avoid a severe overvaluation of their currencies. The value of their currencies has increased sharply against the dollar and to a lesser extent against the euro--the increase started in mid 2003, then there was a sharp but brief reversal between September and November 2008, and since then it has been increasing again. But their governments cannot allow further increases because many exportable manufactures and import-substitute manufactures will not be able to survive (another example of the Dutch Disease problem). So de facto, the nominal exchange rates between each of these currencies and the dollar are becoming fixed at a time in which the current inflows of foreign exchange are putting pressure on their central banks to expand their supplies of local currencies and therefore on inflation (savings rates are low to absorb the large inflow of foreign exchange--these countries are not China). For example, in Chile, today the market closed at 460 CH pesos per US$ despite the Central Bank policy announced last January to buy a large amount of US dollars (at that time the exchange rate was just above 460, well below the record high of 750 in mid 2003). Don't expect the exchange rate to go below 450 because there is too much political pressure to prevent it, while the government will continue struggling to persuade all enterprises other than mining companies that this is temporary (most likely, however, the high price of copper, gold and other metals will continue to pressure for further increases in the value of the CH peso). In other words, the overvaluation of their currencies at a de facto fixed nominal exchange rate implies an accelerating inflation and a declining growth of output. Will their governments rely on fiscal policy to save large amounts of foreign exchange? I doubt it.

Footnote: Between the devaluation of January 2002 and mid 2010, Argentina allowed the nominal exchange rate to depreciate against the dollar, but since then it has "delayed" the depreciation despite a domestic inflation rate of over 20% --now over 30%-- per year. The October election means that there will be further delays in depreciating the nominal exchange rate and therefore the probability of another foreign exchange crisis after the election is high.

In the last 2 or 3 years there has been an explosion of card companies handing out credit cards to one and all.

Most of the lower income groups have no idea how to even calculate percentages, much less handle credit card debt. So, they rapidly get in over their heads. For them, the cards have an interest rate of about 14% a month. They pay the minimum payment, and right away, it does not even handle the interest. These people do end up paying a huge portion of their income just to service their debt. They often make less than $500 per month.

Thanks for your information. Do you have any reference on how the Brazilian financial system has been evolving in the past five years?

It is a cultural thing, common throughout Latin America. You buy all your big ticket items on payment plans. You pay interest on it, of course, but in doing so you are effectively shifting the risk of inflation to the business. That is, at least in part, why so many people do it. If hyperinflation comes and you are only paying 12% interest, then you win. And if Latin Americans don't have a memory of this happening to them, then they've heard the story from their parents.

In Brazil, for most major chains, the consumer actually wins by using installment payments because there is no difference is the total amount paid, but there is still inflation. I have purchased two laptops, my eye glasses, my flat screen monitor, and other things this way.

But there is a way that they buy cars that really gets me -- they make the loan payments 5 years in advance.

T. Naumer, M.Acc.

That's interesting. I hadn't even thought about how it's a way of protecting against inflation, which would make sense considering how big of a problem inflation has been for many Latin American economies.

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