Household debt levels have surged over the past five years in key Latin American countries, including Brazil, Mexico, Chile, Colombia, and Peru.
According to a Tuesday report by Moody’s Investors Service, this increase has created vulnerabilities in their financial systems.
The exposure to consumer loans varies by country.
Brazil leads the pack, with over 40% of its financial institutions engaged in consumer credit, followed by Colombia at 30%.
On the other hand, Peru and Mexico report around 20%, while Chile’s risk is the lowest at approximately 12%.
Moody’s Investors Service focuses on credit risk evaluation across various sectors, including household debt.
The report suggests that increasing household debt has been the main driver behind a rise in problematic loans across the region.
On average, these problematic loans have risen by 44 basis points since December 2021.
Role of Fintech
The expansion of consumer credit is especially noticeable in Brazil, where credit cards have become the dominant form of borrowing.
Regulatory shifts favoring fintech firms and digital transformation have attracted new players to Brazil’s consumer credit market.
These innovations have led to a remarkable annual growth of 51% in credit card debt between 2020 and 2022.
Regional Outlook
Countries like Chile exhibit the highest household debt to GDP ratio at 47%, but their banking systems are least exposed to consumer loans.
In contrast, rising inflation rates since 2021 have forced households to accrue more debt, making countries like Brazil and Colombia more vulnerable.
In Brazil and Chile, easing inflation may gradually improve the situation by the latter half of 2023.
However, Peru and Colombia may continue to struggle with asset quality due to persistent inflation.
Mexico stands out for its resilience in this negative debt cycle and is expected to expand consumer credit in response to rising demand.
Boosted by robust economic growth in early 2023, consumer confidence in Mexico is on the rise.
Traditional banks also adapt to technological advancements, aiming to reach untapped customers, especially in highly digitalized regions like Brazil.
In summary, varying degrees of household indebtedness and exposure to consumer credit contribute to a complex risk landscape for Latin America’s financial sector.
Regulations, economic conditions, and technological advances play pivotal roles in shaping this landscape.