Bad loans in Brazil hit a record high in May, adding to fears that the world’s leading emerging markets were heading for a deeper than expected slowdown.

Brazilian loans overdue by more than 90 days hit 6 per cent, the highest since records began in 2000, the central bank said. The rise calls in to question recent government efforts to stimulate borrowing to try to reignite the stalling economy.

“Credit seemed to hit a bit of a wall in the first few months of this year but it has picked up again more recently,” said Neil Shearing, economist at Capital Economics in London. “The key point is it is still unsustainable. The longer this goes on the bigger a worry it becomes.”

The Brazilian government of President Dilma Rousseff has been keen to apply some of the same medicine to counter this global economic slowdown as her predecessor, Luiz Inácio Lula da Silva, did during the 2009 crisis.

Mr Lula da Silva at the time urged consumers to borrow more and buy more houses, appliances, cars and fridges, leading to a boom that only ended in the middle of last year with the worsening of the eurozone crisis.

But while Brazil’s economic growth in 2010 peaked at 7.5 per cent, last year it fell to 2.7 per cent and this year it is set to grow less than 2 per cent, according to private sector economists.

The central bank has slashed its benchmark interest rate by 400 basis points in less than 10 months to a record low of 8.5 per cent, in a move the government expected to spur growth.

Despite this, banks have been reluctant to speed up lending because of the steady rise in non-performing loans.

The central bank said that among overall non-performing loans overdue by 90 days, those to consumers rose to 8 per cent, the highest since November 2009.

Loans to legal entities, or companies, were steady at 4.1 per cent, down from 4.12 per cent in February but still at their highest since 2001.

Complicating the picture for policymakers, however, is that while industry has been suffering from a strong currency and low productivity, unemployment in Brazil is at record lows.

Credit demand is weaker compared with previous years but lending continues to grow led by the state-run banks.

Mr Shearing said the rising NPLs at a time of high employment, when household finances should be in good shape, was a big warning signal for the government.

“This is the best illustration of the fact that the credit growth we saw was completely unsustainable,” he said.

“If you were designing a stimulus package this time around, it would have huge investment projects, privately funded and publicly backed, and time limited, rather than greater public spending or just stoking up a credit bubble.”

But Alberto Ramos, economist with Goldman Sachs, said in a client note that there were signs that demand for credit had slowed “given the sluggish performance of the economy …and the fact that many households already have to allocate a large share of disposable income to debt service”.

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