(Bloomberg) -- Soaring consumer indebtedness is weakening one of the engines of growth in Latin America, with many families facing a “debt service shock” even as central banks start to cut interest rates, according to an upcoming report from the World Bank.
Consumer credit levels have almost doubled over the past two decades in the region, with household debt reaching 47% of gross domestic product in Brazil and 35% in Chile. That has prompted the World Bank to call for “vigilance” as nonperforming loans have been rising in both countries, along with bad microenterprise loans in Ecuador.
“Some vigilance is needed in order to follow the lagged effects [of monetary policy] in these countries, and the impact as interest rates fall, to offer insight as to what we may see among emerging” economies, the report said.
While Brazil and Chile were among the first Latin American countries to start easing monetary policy, central bankers have pointed to rising consumer debt as a matter of concern. In Brazil, where families spend a third of their monthly wages paying off loans, lawmakers approved a law capping at 100% the interest rate charged on revolving credit card lines.
Read More: Brazil to Cap Credit Card Rates at 100%. They Now Average 450%
Despite high interest rates, labor markets remain firm in most of the region and consumer confidence is rising, supporting consumption. Yet the current easing cycle is expected to be gradual, in contrast with the aggressive monetary tightening that Latin American central banks implemented at the end of the pandemic, when inflation abruptly returned.
Increased household borrowing has partly contributed to the post-pandemic recovery, “but clearly will not contribute to long-run growth in the same way investment spending would,” the report said.
©2023 Bloomberg L.P.