Household debts are another obstacle to GDP growth

Household indebtedness, in a context of above-target inflation and interest rates that tend to remain high throughout the year, is one more obstacle to the growth of the Brazilian economy in 2023.

The number of defaulters broke a record in November and, although it dropped slightly in the following month, it is still worrying. Meanwhile, the basic interest rate (Selic) is at the highest level of the last six years and is pointed out as one of the causes of the economic slowdown.

After an estimated expansion of around 3% in 2022, projections suggest that the Gross Domestic Product (GDP) will grow only 0.8% this year, according to the median expectations of economists consulted by the Central Bank. That is: employment and income should grow very little, which means more difficulty in paying off debts.

This effect of interest on GDP has led President Luiz Inácio Lula da Silva (PT) to repeatedly criticize inflation targets – which, in his view, are too low and force the BC to maintain higher interest rates – and formal independence of the monetary authority.

After its first meeting of the year, when it kept the Selic at 13.75%, the Monetary Policy Committee (Copom) of the Central Bank released a statement that, in the interpretation of a large part of the financial market, indicated an increasingly smaller chance of a fall interest still in 2023.

Until October, economists believed that the BC would start cutting the Selic in mid-2023, taking it to 11.25% by December. That bet rose to 12.5% ​​more recently, and is likely to get even higher in upcoming releases.

During the electoral campaign, Lula promised to implement a debt renegotiation program aimed at the poorest families, called “Desenrola Brasil”. Days ago, after a meeting with the Brazilian Federation of Banks (Febraban), the Minister of Finance, Fernando Haddad, said that the format of the program will be presented this week to Lula and launched in February.

Haddad also said he had spoken with the president of the Central Bank, Roberto Campos Neto, about the development of a “quick credit agenda”. According to the minister, it should involve the system of guarantees, the reduction of the banking spread (difference between the cost of raising funds from banks and the interest they charge from customers) and improvements in the competition environment. “The issue of credit entered the order of the day,” said Haddad.

Renegotiation with high interest leads to “persistent over-indebtedness”, says FGV

An analysis by the Brazilian Institute of Economics (Ibre/FGV) points to a scenario of “persistent over-indebtedness” that tends to inhibit consumption – and, consequently, the advance of the Gross Domestic Product (GDP).

According to researchers from the institution, personal loans, credit cards and overdraft facilities – unsecured and high interest rates – are the main factors responsible for the indebtedness of low-income families.

Default rates for those earning up to two minimum wages are between 10% and 13% in these modalities. This income bracket, which accounted for 19% of the nearly BRL 3 trillion in the individual loan portfolio in the first half of 2022, was responsible for 37% of late payments.

The director of Ibre/FGV, Luiz Guilherme Schymura, explains how high interest rates affect indebted families and, even with the intention of paying off debts, the renegotiation process is time-consuming and affects potential consumption for a long time.

“For the low-income segment, as Ibre researchers point out, it is quite normal to renegotiate debts, but now this is being done in an environment of much higher interest rates, which should create a persistent over-indebtedness, with adverse macroeconomic effects such as, for example, the inhibition of consumption”, says Schymura in an article.

“Indebted people stop buying gasoline, stop paying electricity and water bills, and the impact falls on all kinds of consumer goods”, says Maria Paula Bertran, professor of Economic Law at the Faculty of Law of USP in Ribeirão Preto. “They’re not going to change cell phones, they’re not buying new furniture, they’re selling their cars and taking the bus to work. If you don’t buy a car, the car industry will lay off workers, and so the cycle takes shape.”

What aggravates the scenario is that most of the debts of low-income families are precisely in the categories with the highest interest rates. Camila Faiçal Cruz, Master in Economics and product specialist at Serasa, explains that, on an individual basis, the lack of information often leads people to resort to solutions that seem simple, but which put them in vulnerable situations and increase their debts of families.

“When we talk to debtors and defaulters, what most appears is that they are unaware of the high interest rates for arrears and put themselves in situations that compromise the individuals’ economic cycle”, says Cruz.

No wonder, the credit card is among the main sources of debt. Without paying, the person is left without access to new sources of credit and the situation tends to get worse. “Today, we see that credit is used for basic market and gasoline bills. From the moment you can’t pay that bill, we have less credit being granted, less supply and demand, people buy and consume less, undertake less. Entrepreneurs need working capital and they don’t have it,” adds the Serasa specialist.

From the perspective of macroeconomics, less consumption and less money circulating slow down growth and can lead to economic crises, says professor Maria Bertran: “The increase in household debt critically exhausts the ability to maintain their purchasing routines. People are no longer able, collectively, to maintain their consumption pattern”. She notes that some researchers of the 2008 crisis in the United States point to family debt as one of the neglected causes of that recession.

Credit portfolio broke record in 2022. Number of defaulters too

The total volume of loans in the Brazilian economy broke a record in 2022. In December, the credit portfolio balance was equivalent to 54.15% of the Gross Domestic Product (GDP), the highest in the Central Bank’s historical series, which began in 1995.

After last year’s strong growth, lending is expected to slow this year. The last estimate of expansion in 2022 made by Febraban indicated, after successive upward revisions, an increase of 14.8% in the credit market. For 2023, the expectation is for expansion of 8.2%. Even so, an index higher than that observed before the pandemic – in 2019, the market grew by 6.5%.

Delinquency by individuals, meanwhile, closed the year at 3.85% of the portfolio, according to the BC, slightly below the November level (3.86%). After reaching around 4% in April 2020, the default rate decreased, reaching just below 2.9% in mid-2021. However, it rose again in the sequence. The worst moment of the series, which started in 2011, was in the middle of the following year, when default reached 5.5% of the loan portfolio.

Although the default rate is relatively far from its historic peak, the absolute number of people in arrears is close to its highest levels.

Brazil had 69.4 million people in default in December, almost 43% of the adult population, according to Serasa. The number is slightly lower than that of November, which was a record (69.8 million). The main debts were with credit cards (28.7% of defaulters), basic bills such as water, electricity and gas (22.3%) and retail (11.5%).

Haddad promises to launch debt renegotiation program in February

In the government proposals of some candidates during the elections, renegotiation appeared among the main solutions to reduce the economic impact of the population’s indebtedness.

The government plan that Lula presented at the time foresaw the implementation of the Desenrola Brasil program, with the institution of a credit fund by the State itself to facilitate the renegotiation of trade debts or basic household bills.

The program, according to the campaign, would encourage creditors to offer discounts for paying off debts. For debts with banking institutions, there would be renegotiation of credit card, personal credit and overdraft accounts based on a compulsory deposit instrument from the Central Bank.

According to the Minister of Finance, Fernando Haddad, Desenrola Brasil has been discussed with the banks since the second week of January and will be launched later this month.

For Professor Maria Bertran, the intermediation of the debt renegotiation of low-income families by the State can help to reduce the exploitation of the economic vulnerability of these groups by financial institutions. She advises caution.

“When borrowers accept the renegotiation, they perform a legal act called novation, which is a new contract. This renegotiation interrupts all statute of limitations. When do financial institutions make the most aggressive offers to defaulters? On the eve of prescription. Then the debt will be paid in half, but she accepts that and will be responsible for that debt for another five years, ”she observes.

According to her, financial education is an important step for people to have a better understanding of which accounts have the most impact on indebtedness, but this is not enough to guarantee that they are free of debt. “There is a behavioral point of view that says that people are rational, but they behave thinking that the future will be better than the present. It is human to imagine optimism,” she says.

Consequences of debt go beyond the economic issue

In addition to the impact of family debt on economic growth, with the decrease in purchasing and consumption potential and the reduction in the circulation of resources, specialists also point to consequences in other social spheres. “People who get sick, lose motivation, families who lower their standard of living a lot; thinking about payroll loans, elderly people who start to live with a fraction of what they could live with”, lists the teacher.

According to the fifth edition of the survey “Profile and Behavior of Brazilian Debt”, commissioned by Serasa and produced by the Opinion Box Institute, 83% of debtors have difficulty sleeping due to debt, 78% have bouts of negative thoughts due to debt losers and 74% say they have difficulty concentrating to carry out daily tasks.

“There is an emotional impact, anxiety, insomnia, self-confidence, family relationships, marital relationships, that is, an impact on personal life”, comments Serasa’s product specialist, Camila Faiçal Cruz.

On the other hand, there is an expectation of improvement, both by some institutions and by the population itself. The survey shows, for example, that 69% of respondents are confident that they will be able to pay off their debts soon.