BRAZIL:
Consumers Don't Question Irrational Interest Rates
Mario Osava

RIO DE JANEIRO,  (IPS) - After more than three decades of high inflation, Brazilians have not yet recovered from a distorted notion of prices despite the success of the anti-inflation plan launched in 1994, because interest rates are still absurdly high.

It is difficult to explain to a foreigner how an economy functions, in which consumers pay 225 percent annual interest on their overdue credit card debt and companies pay 60 percent to obtain working capital through a loan, admitted Miguel Ribeiro de Oliveira, vice president of the National Association of Finance, Administration and Accounting Executives (ANEFAC).

The 60 percent rate is a rough average of what medium-sized companies pay, because bigger companies enjoy better conditions, with 18 percent rates, while working capital can cost "up to 120 or 130 percent" for small companies, Ribeiro de Oliveira told IPS.

Brazilians have always lived with this "anomaly," and consumers "don't look at interest rates, but at the monthly instalments they will be paying," to see if they can fit them into their monthly budgets, regardless of whether in the end the product costs two or three times the original price, he said.

A big ad in a Rio de Janeiro newspaper last week offered a "super deal": a Ford or Honda car to be paid in 61 monthly instalments. Never mind the fact that the final cost would be 72 percent above the original price.

In another ad, a Renault dealer merely stated the amount of the monthly payment, without even mentioning the number of instalments.

The lowest interest rates are charged on vehicle sales, because a car can be repossessed in case debtors fall behind in their payments.

The same is true in the case of real estate. Nevertheless, interest rates on mortgages range from 11 to 18 percent a year, which makes home purchases unaffordable for the poor, said Hessia Costilla, an economist with the Brazilian ProTeste Consumer Defence Association.

Because mortgages involve large sums and timeframes of at least 10 years, the debt turns into a snowball, she told IPS.

Without an effective public policy aimed at reducing the cost of mortgages, the country will undoubtedly see continued growth of the "favelas" (shantytowns) that surround Brazil’s cities, said Costilla.

The controversy over interest rates, however, focuses on the decisions taken by the Central Bank, which every six weeks adjusts its prime interest rate that affects all interbank transactions and nearly half of Brazil’s public debt. The aim is to keep inflation close to the target, which was set at 4.5 percent for 2007 and 2008.

The prime rate currently stands at 12.75 percent. But it has been dropping since mid-2005, when it hit 19.75 percent - the world’s highest rate, representing costs equivalent to more than 60 billion dollars a year in interest on public debt, which limits government spending and curbs economic growth.

That is reflected by the interest rates paid by companies and consumers, which are far higher and have been coming down at a much slower pace. Monthly rates in Brazil are close to the annual rates seen in rich countries, Costilla pointed out.

The interest rates charged in Brazil by European banks like Spain’s Santander or the British-based HSBC are 10 to 12 times higher than the rates they charge in their home countries, she added.

Nevertheless, the situation "used to be worse; interest rates are now on a downward tendency," even though it will take years for them to reach acceptable levels, said Ribeiro de Oliveira.

His hope is that the reduction in the Central Bank’s prime rate will cut into the profitability of financing the public debt, forcing banks to lend more money to companies and consumers, which would in turn make it necessary for them to compete for customers by lowering their interest rates.

Only through increased availability of credit and competition among banks will interest rates come down, said both Ribeiro de Oliveira and Costilla.

The total volume of credit in Brazil is still very low, equivalent to 41 percent of gross domestic product (GDP), according to ANEFAC, while in industrial countries it is equivalent to, or higher than, 100 percent of GDP.

The high interest rates are "a remnant of the runaway inflation and price indexation of the past," said Ribeiro de Oliveira.

Between 1959 and 1994, inflation rates in Brazil were over 25 percent a year, with the exception of the period from 1969 to 1973, when rates stood at between 15 and 20 percent. In 1993, the annual inflation rate hit a record high of around 2,500 percent.

In July 1994, the Plan Real strategy launched by the government finally got prices under control, ushering in a new era.

But interest rates replaced inflation in their capacity to erode incomes. A personal bank loan costs 5.4 percent a month, equivalent to 89 percent a year, according to ANEFAC. And to pay off bills early, banks charge 3.59 percent a month, or 51.8 percent a year.

Banks justify their high interest rates by pointing to the credit risk. They also complain about the heavy taxes charged by the government. However, their profits have soared over the last few years.

Businesses charge 6.06 percent interest a month on average for sales on credit, or 102.59 percent a year, more than twice the original price of goods, according to ANEFAC statistics from January.

But instalment plans are the only way the poor can afford indispensable items like refrigerators and stoves.

In recent years, large home appliance stores have begun to avoid cash sales, because they stand to make a much bigger profit through sales on credit. Stores offer products to be paid off in 10 or more "interest-free" monthly instalments in which the interest rate is hidden in the price.

The payments must be made directly in the stores, which thus forces customers to visit regularly, so they can be drawn into making new purchases, said Ribeiro de Oliveira.