Similar to every other global market, Latin America contends with COVID-19. With Mercator Advisory Group’s recent market review in mind, we discuss three events in today’s read: Brazil’s cap on consumer interest rates, Mexico’s move towards financial inclusion, and Mercado Libre, the shining star in the LAC market.
The relationship of COVID-19 and the LAC population is notable, as NPR points out. Latin America accounts for 8% of the world’s population, but it has 30% of global pandemic deaths.
Brazilian Interest Rates
High default and fraud rates in Brazil cause some of the highest consumer credit interest rates in the world. In fact, in July 2019, the Wall Street Journal headlined the topic by stating, “Brazil’s Sky-High Lending Rates Hurt Consumers and Economic Growth.” Consumer credit borrowing rates were 270%, almost twenty times higher than the U.S. average, which is below 12%.
On August 10, Nasdaq.Com reported on a Reuters article that the Brazilian Senate capped interest rates at 30%:
- The novel coronavirus outbreak and its financial impact pushed regulators to take some significant decisions. In its latest move, Brazil’s senate recently approved a bill to limit interest rates charged on credit card debt and overdraft lines. However, the bill will now be presented to Brazil’s lower house to vote.
- Per a Reuters article, a cap of 30% per year has been placed on debt rolled over on credit cards and overdraft lines for all loans extended by banks from March 2020 until the end of the state of emergency declared by Brazil’s government.
The article also pointed out that loan loss provisions at Itau Unibanco and Banco Bradesco both fell over 40% YOY. Shifting from a 270% credit loss-driven rate to 30% will cause consumer credit in the market to shut down. Quickly.
Mexico Financial Inclusion
Mexico’s financial inclusion effort, nicknamed “CoDi,” was a great idea that stumbled from day one. The concept was to give every citizen an electronic bank account in the 131 million person market, which has only a 10% credit card penetration rate and a 25% debit card penetration rate. With COVID-19 impacting 1Q20 and beyond, timing dwarfed the project, as Contxto, a Spanish news source reports.
- Even the best-intentioned public policy can fall a little flat. Case and point is Mexico’s mobile payment platform, CoDi.
- The government launched this system in September of last year, and an initial survey showed many users didn’t even know what CoDi was. I’m sure you know, but just in case: It is the Mexican Central Bank’s free, mobile electronic transfer system.
Mercado Libre, the Amazon of the South
It is not all bad in the LAC market, as the Motley Fool reports triple-digit growth YOY for Mercado Libre. The results come from Mercado Libre’s sweet spot: e-commerce and the integration of payments. Though the stock has taken some recent hits, the firm has 51.5 million active users, and total payment volume increased a whopping 72% to 11.2 billion USD.
Though The Economist says, “Mercado Libre is a wannabe Alibaba” in this article, we think the business is well-focused, driven, and ready for the market. LAC has plenty of challenges, from financial inclusion to public health, and economic distribution, but it keeps trying. Some markets, such as Venezuela, seem to have constant stress. But others keep trying, and with Mercado Libre as a dominant thread throughout the market, there is still promise.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
