Gustavo Ballvé on February 24th, 2011
Food for thought, Portfolio Management, Risk management, Signal or Noise

A collection of articles in the Financial Times from Feb. 16th to 22nd that share a common theme: Brazil’s credit boom is starting to cause concern. It’s uncertain how incentives emanating from the new Federal government and from the Central Bank are really aligned – to grow or to step on the brakes a little harder. We don’t have, nor try to have, strong opinions on GDP growth rates, inflation, interest rates and other such metrics in the short term. Even in the stories we quote here, it’s hard to separate signal from noise. Either side can be “right” but may be getting to that conclusion via inadequate or at least insufficient reasons. The point is to highlight risks so the reader can compare them to the expectations embedded in companies’ stock prices. The good news for us is that while some companies appear to be valued for the most optimistic scenarios, others don’t enjoy the same buoyancy.

One of the pieces is a Feb. 22nd article with a warning by Arminio Fraga, who had said pretty much the same thing for Brazilian newspaper Valor a few days before, that “rapid credit growth needs close scrutiny from policymakers”. He says we’re not at “subprime crisis levels”, but need to keep better watch. Couldn’t agree more.

In fact, an article in that same day discussed Itau Bank’s blockbuster results and optimistic predictions for credit expansion. Itau joined Banco do Brasil and Bradesco in saying that lending still has a long way to go – the often-cited stat is that Brazil’s credit is “just” 46% of GDP, in a direct but questionable comparison to the US’s 165%.

On Feb. 21st, however, Paul Marshall and Amit Rajpal of Marshall Wace said that they believe Brazil may be heading for a subprime crisis and wrote that Brazilian lending standards – as well as general “checks and balances” in our lending “infrastructure” – are poor. At least in this last regard they’re absolutely right. To assert their point that Brazil’s credit is overheating, they point to a questionable comparison of their own: debt service as a % of disposable income in Brazil vs. in the US (much higher in Brazil, compared to a US consumer that’s widely considered over-leveraged).

On Feb. 20th, FT reporter Samantha Pearson discussed the record-breaking (yet again) Brazilian banks’ profits, noting the boost from credit, and found colorful examples of people paying cosmetic surgery in installments. “Noisy” isolated examples must always be taken with a grain of salt, but ignoring them altogether is also not recommended.

In related stories of Brazilian growth, on Feb. 18th Ms. Pearson and colleague Joe Leahy wrote about office rent booming in Latin America in general, but in Rio in particular – it’s now the most expensive prime office rents per square meter in the Americas, including New York. On Feb. 16th, the same duo wrote about Brazil’s infrastructure woes in face of rapid growth.

In the long term, can we have the cake and eat it, too?

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