Key facts
- Delinquency rates on Brazilian non-earmarked loans hit a record 6.2% in May.
- The rise in defaults occurred despite a government program aimed at renegotiating consumer debt.
- Key drivers of deteriorating asset quality include rising defaults in vehicle lending, unsecured personal credit, and payroll loans.
- Interest rates on payroll loans are significantly lower than those for unsecured personal credit.
Delinquency rates on Brazilian loans not tied to a specific purpose rose to a record 6.2% in May, despite the government's efforts to renegotiate consumer debt. The central bank cited rising defaults in vehicle lending, unsecured personal credit, and payroll-deducted loans to private-sector workers as the primary drivers of this deteriorating asset quality. The government expanded payroll lending rules last year, aiming to help borrowers refinance more expensive debt with cheaper payroll loans, which have significantly lower interest rates.
Brazil's benchmark interest rate remains at 14.25%, with policymakers signaling that borrowing costs will need to stay restrictive to combat inflation, which is currently at 4.8% over 12 months, aiming for the 3% target. The country's total credit stock saw a modest increase in May, both month-on-month and year-on-year.
Separately, Brazil's Treasury has warned that fiscal targets will become unfeasible from 2028 without new measures, as mandatory spending outpaces cost controls. The government is targeting a primary surplus of 0.25% of GDP this year and 0.5% in 2027, but projected surpluses from 2028-2030 fall short of official targets, leading to estimated funding gaps and rising gross debt projections.