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Brazil's Domestic Credit Expansion

April 10, 2008

Getting the Fundamentals Right

Brazil, the world’s tenth largest economy, continues its steady, stable economic growth, with real annual GDP increasing by 5.4 percent last year. Economic success can be attributed to a multi-prong approach that includes: macroeconomic stability, consolidation of democratic institutions, a booming export sector, high commodity prices, energy discoveries, low inflation, record foreign direct investment (FDI) inflows ($71 billion in 2007), and a strong local currency. These sound economic fundamentals are both reflected and reinforced by a further deepening of the capital market.

Strong macroeconomic fundamentals have helped to spur higher rates of domestic demand and consumption—some of the main drivers for economic growth. An increase in income, along with expanded credit lines and lowered interest rates, has provided much of the catalyst behind the 6.5 percent increase in domestic consumption last year.

Across the Economy

Nationwide, the Brazilian economy is strong. In 2007, the agricultural sector expanded by 5.3 percent, while the industrial sector grew by 4.9 percent and services by 4.7 percent. GDP per capita jumped 4 percent compared to the previous year. Today, interest rates are at 11.25 percent—the lowest level since June 1996.In April, the Brazilian government plans to raise the minimum wage by about 7 percent, which will allow average monthly earnings to increase from $193 to $207.

A Virtuous Circle

The current explosion in domestic consumption is reshaping the social landscape. Over the past five years, over 20 million Brazilians (more than 10 percent of the population) have emerged from poverty and joined the middle class. At the same time, the number of households earning more than $35,000 grew a whopping 159 percent per year. Meanwhile, the unemployment rate has dropped to 8.2 percent—the lowest level in five years. In 2007, 1.98 million formal jobs were created. A new middle class—approximately 35 percent of the population—has ignited consumer spending on goods ranging from refrigerators to mobile phones, automobiles, and real estate.

Buy, Buy Brazil

Brazil’s boom has extended to areas such as credit, construction, and insurance. Today’s consumers have moved beyond purchasing basic necessities and now demand more sophisticated products including cell phones, electronics, and computers.

Credit boom: A growing middle class has broadened overall access to financial services. For example, since 1999, credit card use has soared 200 percent. This is opening a mass market for consumer goods that were previously accessible only to the more affluent. Mortgages have helped home ownership to become a reality for new people. Over the past four years, total bank loans have more than doubled to reach $530 billion.

Consumption: Sales of new cars, computers, and consumer electronic goods were at record levels in 2007, with much of the extra demand coming from the new middle-class consumers. Beyond the growing middle class, the population of 20- to 49-year-olds is estimated to increase by seven million over the next eight years, making Brazil one of the world’s most attractive consumer markets. Last year, new car sales rose 30 percent and, among emerging markets, Brazil has the highest concentration of car ownership. In 2007, the supermarket sector grew by 6 percent—the largest amount in five years—and the pharmaceutical industry, buoyed by a vibrant market, is growing 24 percent annually.

Construction and real estate: Middle-class expansion together with the introduction of long-term mortgages (previously unavailable) is fueling a boom in housing construction, which, in turn, has boosted employment in the industry. New homes construction is also possible due to a growing mortgage loan market. About one-quarter of the country’s record stock market offering in 2006 came from the real estate sector and the home builders.

Insurance market: Since 2003, the Brazilian insurance market has been expanding rapidly, particularly life insurance purchases. With a population of 184 million, Brazil is a ripe target for the industry. Insurance companies and financial institutions are investing heavily in government securities and have little exposure to the volatile equity market. From 2007 to 2011, the life and retirement savings market is expected to grow at a compounded rate of 19 percent. Homeowner insurance is forecast to increase by 14 percent and health insurance is anticipated to jump nearly 14 percent.

A solid and vibrant middle class is important for economic growth and productivity and for the consolidation of democratic process and institutions. Consequently, a growing middle class has the potential to accelerate key aspects of state reform while improving the rule of law, transparency, access to information, and other areas critical for long-term socio-economic development. At the same time, the boost in domestic consumption not only reflects the crucial tempo of economic development in Brazil, but it also mirrors a transformative change in the country’s fundamentals.