Debt doubts

Lula plans to fulfil election promise and restructure some Brazilian household debt.

Brazil’s president-elect, Luiz Inácio Lula da Silva (“Lula”), is planning to renegotiate some consumer debt with Banco do Brasil and Caixa Econômica Federal, two state-owned banks whose presidents will need to be appointed by Lula once he assumes office – how about that for some negotiating leverage! Guilherme Mello, Lula’s economic advisor, has said that the government will aim to partially guarantee up to USD 18.2 billion of consumer debt related to power, water, retail and phone bills for borrowers earning up to USD 677 per month. 

Lula’s plan comes as concerns are growing about Brazil’s household debt burden. At the end of November, the central bank of Brazil estimated that 12.2% of Brazilian borrowers were at risk, rising to 12.2 million people from last June and triple the 4.6 million figure of 2019. A Brazilian portfolio manager explained, “Overall household debt has increased during 2022 with almost 80% of families indebted compared to 75% last year. 85% of household debts are credit card debts, and credit cards are charging double digit rates. This has resulted in particular pressure on low-income families who are struggling to pay their debts on time. 

Overall household debt has increased during 2022 with almost 80% of families indebted compared to 75% last year.”

Portfolio manager, Brazil

Although the situation has started to become an issue for the banks, which have already set aside funds to cover bad loans, president elect Lula is not expected to change course. The portfolio manager continued, “During his campaign president Lula promised to renegotiate household debt – this doesn’t mean that he will, of course, but we currently expect him to do so. Lula will also be keeping one eye on the markets and he won’t want to upset them. 

Compared to previous cycles of high interest rates, this time Brazilians have higher household debts and consumer debt restructuring may not be enough if the country does not improve its current economic conditions. If interest rates stay high and economic activity low, Brazil’s unemployment and borrowing costs will continue to rise and increase the number of risky debtors. 

Fortunately, an emerging-markets credit trader at a global bank believed that Brazil has these matters under control, “Brazil is looking strong for 2023. The Central Bank acted quickly to control inflation by increasing interest rates and Brazil’s energy resources have provided further insulation such that we expect the rate of inflation rate to be 5% next year. Additionally, credibility is high with Brazil, the real has remained very stable throughout the year, even considering that Lula may favour expansive fiscal policies, Brazil is not expected to significantly increase its debt levels. Therefore, lower interest and inflation rates will result in some relief for more indebted families and may also be good news for the labour market. 

Brazil is looking strong for 2023 [and] is not expected to significantly increase its debt levels.”

Emerging-markets credit trader, global bank.

As for the banks themselves, Bradedsco, Brazil’s second largest bank, reported a 22.8% drop in third quarter profit and increased the funds that may be needed to cover bad loans. At the same time, the default ratio in non-earmarked loans has increased to 4.2% in October 2022, showing that consumers’ ability to pay has continued to deteriorate despite the moderate improvement of economic indicators. 

Important Notice
While the information in this article has been prepared in good faith, no representation, warranty, assurance or undertaking (express or implied) is or will be made, and no responsibility or liability is or will be accepted by Deheza Limited or by its officers, employees or agents in relation to the adequacy, accuracy, completeness or reasonableness of this article, or of any other information (whether written or oral), notice or document supplied or otherwise made available in connection with this article. All and any such responsibility and liability is expressly disclaimed.
This article has been delivered to interested parties for information only. Deheza Limited gives no undertaking to provide the recipient with access to any additional information or to update this article or any additional information, or to correct any inaccuracies in it which may become apparent.

Most recent in Financials

Building Bridges

The Bridgetown Initiative deserves financial support.

Bolivia’s wallet is feeling light

Dollar shortages and policy reversals. 

Banking on it

Nubank is disrupting banking in Brazil and beyond.

Shallow Pockets

Cuba’s economic challenges (and there are plenty).

I wouldn’t bank on it 

Peru's economic landscape amidst interest rate cuts and uncertainties. 

Bolivia’s economic challenges 

Navigating political turmoil and market uncertainty. 

SoftBank’s Latin America investment strategy

Opportunities and challenges as investors divert their attention to LatAm.

From Global-isation to Local-isation

Nearshoring in Mexico and Central America.

Glimpses of hope

Argentina toils through economic turmoil with light at the end of the tunnel.

Desperate for dollars

Bolivia seeks to sell off remaining gold reserves to alleviate economic crisis.