Guatemalan GDP and consumer credit numbers were released 16 July and 15 July (respectively) – both worth noting in the wake of the IMF report earlier in the month, which noted consumer credit growth as a concern, and the fairly positive outlook for 2014 GDP. The concern over consumer credit growth is particularly valid as substantiated by data released this week.
GDP posted a year-on-year gain of +3.7% for the second quarter of 2014, driven by exports, remittances and tourism. The rate of GDP growth in Q2 and Q3 is broadly in line with that of 2013, with 2014 growth expected to close around the 4% mark, and the forecast range between 3.3-3.9% (i.e. a 20% range). The Guatemalan Central Bank (‘Banguat‘) considered economic activity to be as dynamic as the prior year, with Q2 and Q3 of each year indicating typically higher growth. Remittance data clocked in at a healthy 9.09% growth reflecting improved economic conditions in the US – and underpinning consumption. According to the Superintendencia de Bancos de Guatemala (SIB), consumption and remittances account for 35% of GDP growth, followed by an 18% contribution from exports and 12% from manufacturing.
Whilst Banguat indicates that economic growth is tracking as expected, credit growth is tracking at an alarming rate of +12% since July 2013, and a whopping +67% over 5 years. Outstanding consumer debt stands at USD16.8 billion, or USD5,316 per person between ages 20-60 (per demographic statistics sourced from World Bank). Car loan and credit card debt posted significant growth, with car loans +9.7% year-on-year, and credit card debt +18.6% year-on-year, with 937,245 card users and total credit card debt of USD1.0 billion, equating to around USD1,100 per card user. In June 2006, when there were 26 card issuers for 700,000 cardholders, credit card debt was just over GTQ2 billion (equating to approximately USD369 per user). Against average wages, this is a relatively high level (noting that in a country with significant wealth disparities – averages are rarely helpful metrics) and default rates on credit cards are tracking at 3.89% (vs car loan default rates at 2.38%, and total loan defaults at 1.56%).
Figure 1. Growth in credit card debt to end of 2013 (Source: La Prensa Libre, 20 Dec 2013)
Amongst other oversights in regulation, interest applied to credit cards is not regulated – and the average current interest charged on credit cards is 45.94%, compared to 12.58% for a car loan. Whilst so many ongoing reform and regulatory issues are presently under discussion, perhaps of greater importance than consumer debt reforms, the need for further scrutiny over consumer credit is warranted, particularly given the necessity to strengthen the integrity of the country’s banking system. Any significant slowdown in the labour market, or marked slowdown in remittances, has the potential for significant adverse effects on consumer loan defaults, with the brunt of this being borne by the banks. Whilst the next figures reported will be after the receipt of BONO14 payments (bonus season in July – with recipients typically using bonus to pay down debt or make new purchases), the general trend and pace of growth in consumer lending is concerning.
Reform on consumer debt practices is unlikely to take place promptly, and whilst reform at a government level is one aspect, improving lending standards at a banking level to prevent increased levels of default would allow the banking sector to initiate self regulation. Whilst generating high interest penalties from credit card users forms part of the revenue model for participating banks, excessive interest would undoubtedly contribute to the increased probability of default – more acutely so in the case of borrowers who lack financial acumen. In the event that consumer credit is brought in to line via stricter lending practices in an attempt to curtail growth in consumer debt, and particularly credit card debt, consumption would likely report a slowdown, which has a knock-on effect for headline GDP statistics. Remittances play a significant part in supporting consumption – and whilst the US economy is recovering, the growth in remittances would need to continue to be solid to offset any domestic slowdown in consumer lending.