Brazil’s credit growth likely slowed further in February

In the past few months, slowdown in Brazil’s credit growth quickened as individual and business credit growth decelerated sharply. Due to declining credit growth and high inflation, real credit growth has been significantly negative. The credit growth rate of 6.2% y/y in January was below one-third of that in 2010-2011 cyclical peak. According to Societe Generale, it is likely to have declined further in February to 5.8%.

The persistent slowdown is due to increasing joblessness, tighter monetary policy and falling business sentiment. Therefore, this trend is expected to continue for many quarters. There is a possibility of rise in loan default rates due to increasing unemployment. The credit/GDP ratio has continued to be near to 54% as the nominal GDP growth is declining at a stronger pace.

Brazil’s Finance Minister Nelson Barbosa had proposed credit measures worth BRL83bn earlier in 2016 for many sectors. According to Societe Generale, if the new measures are successfully implemented, it might help improve GDP growth to certain extent by increasing the consumer and business credit growth pace.

“On our estimate, if the proposed credit measures are fully absorbed in the economy, the growth path will likely rise by close to 1pp”, says Societe Generale.

However, at the current stage of credit cycle and growth, this is unlikely to happen.