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Weekly Report - 12 May 2022 (WR-22-19)

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BRAZIL: Politics of debt could play big in elections

Recent data on consumer debt, which is customarily confined to specialist business publications, could have significant political implications. A lot of Brazilians are currently in debt, and they are not happy about it. That anger could have an impact on the way they vote in this October’s presidential elections. 

According to a regular survey by the national confederation of commerce (CNC), three out of every four Brazilian households are now in debt (77.7% in April - up by 10.2 percentage points on the same month last year). Experts argue that in some cases, where consumers are confident about their long-term ability to repay, consumer debt can be positive: families use it to acquire big-ticket goods (such as homes and cars) and the economy benefits from surging consumer demand.

This does not, however, seem to be the case for many Brazilian families right now. According to the CNC data, just under a third of households say they have fallen behind on debt repayments, and one in ten (10.9%) say they will be unable to pay the debt they have incurred. By far the largest amount of household debt (88%) is held on credit cards, which also happen to charge the highest interest rates.

Other important categories of debt are for mortgages, car hire purchase agreements, and personal loans. For many Brazilians, this is a deeply unpleasant experience. A separate survey by credit rating company Serasa Experian suggests that in March a total of 65.69m Brazilians were in default on loans. The average defaulted debtor owes just over BRL4,000 (US$778 - about four times the minimum wage).

Because inflation and interest rates are rising there could be a ‘perfect storm’ of growing consumer debt before the October elections. Wage growth has fallen behind inflation (which rose to 12% in the year to mid-April). The central bank has imposed one of the world’s sharpest monetary tightening cycles, taking its Selic benchmark interest rate from 2% to 12.75% in the space of the last 14 months. There is therefore a strong chance that more families will fall into an increasing debt trap since their incomes are not keeping up with the cost of living.

A key question is how a consumer debt crisis might affect voting intentions in the upcoming elections. In principle economic problems of this type tend to primarily hurt the incumbent government. That suggests that the emerging debt crisis is bad news for the re-election campaign of the right-wing president Jair Bolsonaro, and good news for the left-wing challenger and former president Lula da Silva (2003-2011).

But it may not be as simple as that. While a right-winger, Bolsonaro has not been a fiscal conservative: he is also a populist and has made a point of wooing low-income households with public works and extending the Auxílio Brasil programme of cash transfers to the poor.

It is entirely possible that low-income voters who have benefited under Bolsonaro will not hold him directly responsible for the debt explosion. There has been some evidence that Auxílio Brasil has slightly weakened Lula’s traditional appeal in the northeast of the country, the traditional bastion of his support.

Campaign launch

Former president Lula da Silva launched his election campaign unofficially on 7 May in São Paulo at the head of an alliance of political parties and grassroots movements called ‘Vamos Juntos Pelo Brasil’. He criticised the Bolsonaro administration’s privatisation of key state businesses as well as an increase in energy costs, and he promised to rebuild a stronger state, from public banks to environmental protection. Speaking at an agriculture fair in Santa Rosa city, Rio Grande do Sul state, Bolsonaro too criticised high energy costs.