Brazil has been on a credit binge. During the past five years credit growth has run at 2.4 times nominal gross domestic product. This compares with 2.0, 1.6 and 1.2 times for Russia, India and China respectively.
Normally this isn’t a problem because leverage is rising from a low level and the ratio of loans to GDP is “only” 46 per cent; this compares with private sector debt in the US at 165 per cent of GDP.
The problem lies with the burden that this debt is imposing on borrowers. In spite of a fall in inflation to a manageable rate of 6 per cent, the banks in Brazil charge an average lending rate of approximately 25 per cent and, in the case of consumer lending, rates are well in excess of 30 per cent. This means that the Brazilian borrower base is paying “real” interest of circa 20-25 per cent against a norm of 1-3 per cent in most countries. Borrowing in Brazil is punitively expensive.