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Brazil Consumer Default Rate Stays at Nearly Three-Year High

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Nov. 29 (Bloomberg) -- Brazil’s consumer-loan default rate in October remained at the highest level in nearly three years, even as lending rates fell to a record low in the world’s second-biggest emerging market.

The consumer default rate remained at 7.9 percent for the fourth straight month, the central bank said in a report distributed today in Brasilia. That matches the steepest level since November, 2009. The company loan default rate rose to 4.1 percent from 4 percent a month ago.

President Dilma Rousseff’s administration has sought to lower household debt burdens as part of efforts to spark a rebound in Brazil’s $2.5 trillion economy, which is forecast to grow the slowest among major emerging markets this year. Government officials have pressured banks to cut loan rates and expand credit, while Rousseff in September called on them to bring profits down to “civilized” levels.

Policy makers continue to say that higher income, near record-low unemployment and increased bank selectivity will drive default rates lower this year. “The most critical moment has passed,” Tulio Maciel, head of the central bank’s economic research department, told reporters in Brasilia, adding that default rates will fall this year.

In June, central bank President Alexandre Tombini said default rates would fall through the remainder of 2012. So far that hasn’t occurred.

Labor Market

Strong labor market conditions will help reduce consumer default rates, said Jankiel Santos, chief economist at Banco Espirito Santo de Investimentos.

“We should see a decline in the next few months,” Santos said in a telephone interview from Sao Paulo. “After a period of increases, I see the current stability as a positive precursor for numbers that should be released in the next few months.”

Last month, Rousseff signed legislation establishing a bureau that will assign credit scores by tracking factors including consumers’ debt-to-income ratios and payment punctuality. The law repealed rules allowing credit-card insurers to only gather data on defaults and delinquencies.

Mixed Results

Brazilian banks are reporting mixed results in efforts to reduce default levels. Banco do Brasil increased provisions for bad loans to 3.76 billion reais ($1.8 billion) in the third quarter from 3.68 billion reais in the prior period and 3.26 billion reais last year, the bank said in a Nov. 8 regulatory filing. Itau Unibanco Holding SA and Banco Bradesco SA, Latin America’s largest and second-largest banks by market value respectively, said last month delinquencies through the third quarter fell for the first time since 2010.

Brazil’s average rate on loans declined in October to 29.3 percent from 29.9 percent in September. Average rates on consumer loans fell to 35.4 percent, the lowest on record, from 35.8 percent the month prior. Rates on corporate loans dropped to 22.1 percent from 22.6 percent.

Outstanding credit rose 1.4 percent in October from September to 2.3 trillion reais ($1.1 trillion), the central bank said today. Credit expanded 16.6 percent from a year ago.

Government officials have said stimulus measures are sparking stronger growth. Foreign direct investment in October exceeded economists’ forecasts, while retail sales increased in September for the fourth straight month. Even though industrial production dropped in September, officials have said output will be positive in October.

The government expects third quarter growth to reach 1.2 percent, while gross domestic product will expand at least 4 percent next year, Finance Minister Guido Mantega said Nov. 23.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose three basis points, or 0.03 percentage point, to 7.32 percent at 12:27 p.m. local time. The real weakened 0.6 percent to 2.1061 per U.S. dollar.

To contact the reporters on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net; Raymond Colitt in Brasilia at rcolitt@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net