In Brazil, middle class dreams built on credit

BRASILIA (Reuters) - Housekeeper Leonides de Moraes is part of the emerging middle class fueling Brazil’s economic revival -- but try telling her that.

A man stands in front of the refrigerators at Ponto Frio store in Rio de Janeiro July 15, 2008. REUTERS/Bruno Domingos

Like others in her income range, she scrapes together a precarious living that highlights the risks of a growing boom in personal credit in a country still suffering some of the world’s greatest inequalities.

Aged 66, she takes two buses and a train on a daily two-hour commute from the poor outskirts of Rio de Janeiro to the city center. She chuckles at the notion that she is part of any middle class.

“You mean the poor class,” she jokes. “Things are difficult. Without side-jobs, wage-earners would go hungry.”

Like many in Brazil’s “class C” -- defined as households with salaries ranging from 726 to 1,195 reais ($457 to $753) a month -- de Moraes has used installment payments to buy durable goods, such as her first washing machine.

While she draws the line at credit cards, many others do not, and concerns are growing that the new middle class may be overextended.

“The degree of instability, of vulnerability is tremendous,” said Nilson de Oliveira, a researcher at Sao Paulo’s Fernand Braudel Institute of World Economics.

At a time when the United States, the world’s largest economy, is suffering from excess borrowing gone awry, analysts fear the consequences could be worse in a country still marked by widespread poverty and inequality of income.

In the past two years, more than 23 million people have risen into Brazil’s class C from classes D and E, according to consumer research firm Cetelem, helped by a rise in the minimum wage and government programs as Brazil enjoys high commmodity prices, a stable currency, and tamer inflation.

Many of them have also gained access to mortgages, consumer loans and credit cards, privileges enjoyed until recently only by the wealthy.

“Today we basically have the opportunities that our bosses have, thanks to the credit card and to how easy it is to buy in the market,” said Nilza Rodrigues, 45, who works as a caregiver in the southeastern city of Belo Horizonte. Rodrigues said she now has a television, DVD player, and microwave and noted with pride that her fridge is the same brand as her boss’s.

The number of credit cards in Brazil rose 91 percent between 2002 and 2006, Cetelem says, while personal credit has risen to 12.3 percent of GDP, approaching U.S. levels of 18 percent.

Some analysts worry that the interest rate burden from multiple installment payments could make for a dangerous cocktail in a country where many are still financially illiterate.

“We have to be very careful with credit. Consumers have to think twice before taking on a commitment,” said Charles Lotfi, head of the business chamber in Belo Horizonte.

“For businessmen it is important that people consume but it has to be a sustainable consumption because ... inflation is already here with its claws ready.”


From Rio’s Copacabana beach to the streets of the capital Brasilia, vendors push pamphlets on passers-by promising them “fast money” in bold letters.

Consumers can buy anything from a fridge to groceries in five or twenty installments, while even the keenest eye needs glasses to see the overall price written in very small print. Consumers often end up paying double the price of an item through long installment plans at interest rates of up to 31 percent a year.

The number of people with debt over 5,000 reais ($3,150) has risen around 47 percent since December 2005, according to central bank data, while mortgage lending, although coming from a low base, was up 26.5 percent in the 12 months to May.

At the same time, individual default rates have been rising slightly, reaching 7.27 percent in May of this year compared with 5.95 percent in the same month of 2001.

Ricardo Amorim, executive director of emerging markets at WestLB in New York says Brazil’s household debt as a percentage of GDP at close to 7.5 percent still trails that of other regions, especially developed economies which are above 50 percent.

But the lack of education about debt management in Brazil means many are likely to get burnt if they lose their jobs or if interest rates rise further.

“A person resorts to credit cards, often not knowing exactly how it works, ends up paying the minimum, thinking she is reducing the value (owed) somewhat but in reality the remaining debt is only rising,” said Stael Riani, who heads a consumer protection agency in Belo Horizonte.

The agency has launched a campaign called “Live Without Debt” to advise consumers in the city of the risks of borrowing too much -- warnings echoed by Rio housekeeper de Moraes.

“A wage-earner can’t have a credit card because he keeps on buying without a clue,” de Moraes said. “And when he realizes, where is the money to pay?”

(For more stories on booming Brazil, see)

($1=1.588 reais)

Reporting by Ana Nicolaci da Costa; Editing by Stuart Grudgings and Eddie Evans