New middle class indebtedness bars further loosening of credit in Brazil

The purchasing power of the lower social classes, known as “classes C and D,” also known as the new Brazilian middle class, has not jumped in spite of lower interest rates. According to economist heard by Agência Brasil, the slowdown shows that the expansion of consumption that was to be spearheaded by the new middle class, although not exhausted, has run into a wall: family indebtedness.

This can be seen in Central Bank data on loans and financing operations by the financial system. In March they grew 1.7%. And in April, only 1.2%.

Fabio Gallo, professor at the Getulio Vargas Foundation and an expert in credit, says that apparently we have reached the end of a cycle that began in 2009 when the government unveiled a stimulus package in the midst of the international financial crisis. At this moment, says Gallo, the lower interest rates (including the benchmark Selic) and easier access to credit will have limited effects.

“Payment delinquency rates are at a record level (officially at 5.9% in March and April). At the same time, around 25% of the population is deeply in debt. Most of the indebtedness is exactly in the ‘classe C.’ These are people who fudged the math when they bought a car without a down payment that was to paid off in 60 easy monthly installments,” says Gallo, adding that it is not just late payments that are the problem. “Even families who are up to date with payments have no way to take on further debt at this time.”

Gallo goes on to say that this credit bottleneck does not mean that the growth in the new middle class through a consumption model is outdated. “These measures may have the desired effect on the economy, but it will take time. Income must continue to rise and families have to pay off the debts they have acquired,” he concludes.

Newton Marques, a specialist in personal finances at the University of Brasilia, also refutes the idea that the model is no longer valid. Economic growth based on Class C and D consumption continues to be possible, he says. “This is a moment of transition. It is a time for families to reorganize before credit moves through a new cycle of growth,” says Marques.

As for lower interest rates, Marques says that at the end of the day people will just get further into debt. “At the moment consumers can extend their debt at lower interest rates, debt capacity increases,” says Marques. And that is when families in the new middle class must be more careful with their finances, the economist concludes..