Brazil’s economic tumble

By Nathan Lee, Financial Analyst

Economy Brazil World Cup Challenges

In 2007 Brazil was awarded the football World Cup with the backdrop of a strengthening economy and the prospect of social change. As it prepares to host the finals, the South American powerhouse lays dormant.

There’s a subdued atmosphere surrounding Brazil in the run up to the football World Cup and 2016 Olympics.

The cost of shining a spotlight on South America’s economic powerhouse has pushed the country to breaking point. Brazil’s economy contracted by 0.5% in the three months to September and analysts believe the dive may continue over concerns of a possible debt rating downgrade for the sovereign.

Schroders’ Emerging Markets Economist Craig Botham says the figures are primarily worrying because, against the backdrop of a weaker currency, net exports are down and the depreciation has not resulted in the macroeconomic adjustment we would expect. Additionally, government spending continues to grow against the backdrop of a fiscal deficit of 3.2 per cent of GDP and a consumer debt service ratio of 21 per cent.

With an election imminent, Brazil looks to be facing a situation akin to Gordon Brown’s spending frenzy before Labour lost their long-term political standing to the baby faced duo of Cameron and Clegg.

“There is no silver bullet for Brazil’s current situation,” Botham says. “High inflation and weak growth limit the scope for loose fiscal or monetary policy as effective remedies. The medicine the economy needs most of all is structural reform to address the many supply side bottlenecks and to incentivise new investment. Unfortunately, we suspect that action on this front is unlikely ahead of October’s elections in 2014.”

New investment is a concept championed by organisers of the World Cup and Olympics, and to a large extent they deliver. Britain has seen a surge of inward investment since the London 2012 Olympics. The £8.9 billion investment has returned a £9.9 billion boost in trade and investment according to UKTI, but London was in a place to fork out such levels of investment, and was not banking on an economic return in inward investment.

For Britain, the London 2012 Olympics was the modern equivalent of the Great Exhibition of 1851in the Crystal Palace. Rather than showcase industrial supremacy, we used the event to promote London as a business hub, hence why VIP seats were left empty as the UK public entered ballots to get tickets; it was never meant for them.

Brazil, on the other hand, has a more realistic, rather than materialistic view of the World Cup and Olympics. In 2007 the country was championed as the leader of the BRIC pack and powerhouse of South America. Economic growth was 5.4 per cent, inflation dropped to 3.6 per cent and the current account surplus increased to $3.6 trillion. Brazilians had more income to spend domestically, the country had paid off its debt to the International Monetary Fund (IMF) a year ahead of time and things were looking rosy. If any country could host two international events in a row, it was Brazil.

Fast forward to 2013 and hosting the World Cup and Olympics seems more like a gamble than an economic certainty.  Like South Africa’s World Cup and the Athens Olympics, it risks two weeks of fame for many years of financial turmoil and a huge scraping bill. The South African government has struggled to put a figure on the economic impact of the World Cup, releasing a mid to long-term projection of $6 billion based on a series of unpredictable variables. The Olympic site in Greece remains in rubbles, now a scar on the face of the city, rather than a symbol of status among the world’s elite.

As things stand, Fifa look to be the only ones who will benefit from the World Cup in Brazil. The world soccer organization earned $2.4 billion from selling television rights to the World Cup in South Africa and $1.07 billion from marketing rights. Their spend in relation to returns far exceeds Brazil’s, and one must question whether spending billions of dollars on events in countries where poverty is still prevalent is the economic saviour they expect.

Economists Simon Cooper and Stefan Symanski wrote about the World Cup in Brazil in their 2012 book, Soccernomics: “The Brazilian World Cup is best understood as a series of financial transfers: from women to men (who will have more fun), from Brazilian taxpayers to FIFA and the world’s soccer fans, and from taxpayers to Brazilian soccer clubs [who benefit from new stadiums and marketing for soccer] and construction companies. Possibly Brazilian society deserves these transfers. Still, we have to be clear that this is what’s going on: a transfer of wealth from Brazil as a whole to various interest groups inside and outside the country.

“This is not an economic bonanza. Brazil is sacrificing a little bit of its future to host the World Cup.”

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