Brazil Defaults Hit 8-Year High Despite Improved Credit

BRASILIA (Dow Jones)--In a sign of increased stress in Brazil's economy because of a global recession, the country's loan default rate reached an eight-year high in May despite a continued ongoing decline in average lending rates.
Brazil's central bank reported the overall average default rates, which take into account loans 90 days past due, rose to 5.5% in May from 5.2% in April. The May default rate was the highest since September 2000.
The bank said the default rate for individual borrowers reached an all-time record during the month, rising to 8.6% from 8.2%. The rate for businesses rose to 3.2% from 2.9%.
Speaking following the release of the figures, a central bank official said the recent surge of loan defaults was a result of a disappearance of financing options in the wake of a global credit crisis that took hold in the fourth quarter of 2008.
"With an abrupt drop in financing, companies and households saw difficulty in rolling over their debt," said central bank economics department coordinator Altamir Lopes. "With the restoration of credit lines, the expectation is that loan defaults will decline."
The increase in defaults came even as the country continued to report progress in the reduction of average credit rates.
The central bank reported average interest rates fell in May to 37.9% from 38.6% in response to easing local monetary policy. The monetary authority said the average bank credit rate for businesses fell to 28.5% annually in May from 28.8% the previous month, while the rate for individuals fell to 47.3% from 48.8% in April.
The overall decrease in interest rates came as the Brazilian central bank continued to cut the country's reference Selic interest rate amid concerns over a sluggish economy.
Since January, the bank has cut the country's reference Selic interest rate 4.5 percentage points to 9.25% annually.
According to recent central bank market surveys, the Selic rate is expected to decline by another half percentage point before the end of the year.
Brazil's overall credit volume continued a long-running rise during the month.
According to central bank data, total available credit in Brazil, including government-directed and non-directed credit, rose 0.8% to 1.26 trillion Brazilian reals ($641 billion) in May, or the equivalent of 43.0% of gross domestic product. Compared to May 2008, total credit supply in Brazil has expanded 20.5%.
The central bank reported non-government-directed lending volume rose 1.7% in May to BRL673.2 from BRL672.0 billion. The May result represented the fourth consecutive month of increasing credit volume in Brazil.
Lending to individual borrowers rose during the month to BRL289.9 billion from BRL285.7 billion in April, while lending to businesses fell to BRL383.2 billion from BRL386.3 billion.
The central bank's Lopes said that despite a temporary reduction in the availability of local credit lines prompted by adverse global economic conditions, credit would nonetheless expand significantly this year.
"Expectations have improved, because we are seeing a faster-than-expected recovery of the credit market," he said.
Lopes said total credit would likely increase by 15% in 2009, reaching 45% of GDP by the end of the year.

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