Um Outro Gol Contra (Another Own Goal)

You might think the Petrobras scandal is bad enough, but Brazil has another self inflicted and serious issue that is going to be a drag on growth for years to come. It is known that China held off the effects of the financial crisis by mandating an expansion of private credit through the banking system.  What is not so well known is that Brazil did the same thing and did it by a similar magnitude.

Consumer and corporate spending have been underpinned in the country by three government owned banks: Banco do Brasil, Caixa and BNDS, the development bank. Just as there will be payback for the illusory growth created by overinvestment in China, the same will occur in Brazil. When and if the Petrobras scandal is resolved, Brazil will still be haunted by years of subpar growth due to the government  ordained credit binge.

Some background:

Domestic private credit in China expanded by about 30% of GDP from the end of 2006, the year prior to the financial crisis, to end 2013.  The same measure expanded by 30% in Brazil too.  The levels of private credit in each country were and are different, but the 30% change relative to GDP was the same and that is what matters. Large credit expansions relative to GDP over short periods of time have been shown to lead to slow growth and often precursor poor equity market performance too.

BR PVtCredit2GDP

China (blue) | Brazil (orange)

The government mandated part of the expansions began in 2008 in both countries, but Brazil’s was initially overshadowed by a pullback in lending by the privately owned banks. Year over year growth in private bank lending fell precipitously from late 2008 into 2009 as shown by the orange bars in the top lower panel of the chart below.  It rebounded for a time in 2011, but has been modest since.  The last reading is 5.8%, so private bank credit is growing at less than the 7.7% inflation rate.

Credit growth from the three government owned banks took over in mid-2008 and has been robust ever since. In 2013 the lines crossed as the total outstanding amount of private credit emanating from government owned banks overtook loans by privately owned banks. At the end of 2014 the government three were still expanding loans at a 16.5% annual rate.

BR BankLoans

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