Can the Rio Olympics help Brazil through its economic problems?

As many sporting fans await the start of the Olympics, it is hardly an understatement that the host country, Brazil, faces a number of economic and political challenges. Some of the many problems include an ailing economy and an uncertain political situation.

Other countries have also seen their share of problems leading up to the Olympics, from the Russian team’s doping scandal to Pakistan’s dire state of its sporting facilities. Yet, as Brazil lurches from one crisis to another, it remains to be seen if the Olympics will help the country overcome its problems.

The Economist notes that Brazil enjoyed a period of economic growth of 2.2% year-on-year average from 2011 to 2014. Between 2002-2008, the country experienced an average GDP year-on-year growth rate of 3.5%. The article also noted that Brazil’s unemployment rate even dipped below 5% for most of 2014.

This was reflected by the National Index of Consumer Expectation as the statistic remained above 100 from 2008 until early 2015—a number above 100 indicates increasing confidence. According to Trading Economics, the consumer expectation measure “focuses on consumer’s current financial situation and on expectations about inflation, unemployment, wages and major purchases for the next 6 months.”

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Economic and Political Malaise

These statistics seem to paint a rosy picture. However, Brazil has faced a number of severe problems that have compounded over the past five years. The fall in the commodity markets is especially painful for Brazil, considering that its commodity exports comprised more than 50% of total exports.

From 2000 to 2013, China’s annual trade with Brazil grew from $2 billion to $83 billion. Yet, as China grapples with its economic restructuring, Brazil suffered as commodity prices saw a sharp downturn.

These external problems were furthered by what John Lyons and Paul Kiernan of The New York Times have reported as the “resource curse.” Countries with abundant resources will benefit from great booms, but will inevitably fall into a trap of economic mismanagement and overvalued currencies.

The European Central Bank supports this, noting that Brazil has structural weaknesses ranging from poor infrastructure to a considerable informal sector. Such structural problems inevitably weigh on the economy, with the GDP falling by 3.8% in 2015. Inflation has now reached 8.84% in June year-on-year—considerably higher than the government-set target of 4.5%. The high inflation has forced the Central Bank to keep its benchmark interest rates of 14.25%.

With all these problems, Brazil’s credit rating has been reduced to junk status by Moody’s Investors Service, S&P and Fitch. With growing government debt and increasing interest payments, Brazil’s interim president, Michel Temer, will look to cap government spending.

As Brazil tries to put its economy together, the country still faces political difficulties. High-profile corruption clean-ups have implicated the oil giant, Petrobas, and several politicians. Suspended President Dilma Rousseff is currently undergoing an impeachment trial for altering the budget in her favor.

The Transparency International corruption perception index allocates a score of 100 to a “clean” country, while zero indicates the most corrupt. From 2014 to 2015, Brazil saw its score fall from 43 to 38.

Olympic Promise

With Brazil’s economy reeling, it is a wonder if the Olympics will be the boon that the country needs. Other than the sporting marvel that will come to Rio de Janeiro, the host city, there are some economic benefits.

Around 350,000 tourists are expected to come and view both the Olympics and Paralympics, which means that there will be an increase in consumer spending. With an uptick in consumption of goods and services, this could translate to increased employment to serve the swell in tourism.

Kevin Daly, from Goldman Sachs, wrote about the London 2012 Olympics that there are longer-term benefits “such as the promotion of London and the UK as a tourist venues and as a potential location for investment”.

Within the same report, Daly also mentioned that London may not accrue as many longer-term promotional benefits from its time hosting the Olympics because it is already known for tourism. The same could be said for Rio.

The city could also benefit from increased investment that may not only boost the infrastructure for sporting events, but to also improve transportation and other venues. Indeed, Moody’s has explained that there will be benefits from the $7.1 billion investment in the city’s infrastructure such as metro advances.

Investments such as these could be utilized in the future—lest they become “white elephants”—as Goldman Sachs economists Yu Song and Michael Buchanan stated in a report on the Beijing Olympics that “more than 90% of the total investment for the games was in telecommunications, transportation and utilities…and most of this has been fully utilized since”.

The positives from increased investments in Rio have also brought forth controversies through forced evictions and the fact that the Olympic budget has already been exceeded by 51%.

Yet, there are other factors that cannot be measured—from the promotion of the host country’s culture to the pride that comes from hosting the Olympics—as suggested by sports scientist Holger Preuss. Daly, Song and Buchanan mention other benefits of promoting sport as well as healthy lifestyles and even increased environmental awareness—the final point specifically benefited Beijing.

Tim Toohey, researcher from Goldman Sachs, stated that “defining feature of whether the London Games provides a better economic return than the Sydney Games could well be the high degree of slack in the UK economy”.

Slack refers to the amount of resources, which includes labor and capital that are currently unemployed. Brazil does face an unemployment rate of 11.2%. While labor and capital can be employed to help during the Olympics—whether it would be transitional use or not—the structural problems still remain.

In order for Brazil to benefit from the Olympic potential, it will have to rein in corruption and get rid of the uncertainty in the political system.

It should also reduce its dependency on commodity exports so as to not be susceptible to adverse changes in prices. With so much uncertainty in the economic and political realms, it may be best to simply enjoy the sporting marvel that the Olympics promises to be.

Credits –

This article was originally published by Fair Observer

Author: Daniel Currie

Featured image: Wikepedia/Creative Commons/Agencia Brasil

Podcast: SoundCloud/This Week In Brazil

Video: YouTube/Olympic

Disclaimer: The opinions expressed within this article are the personal opinions of the author and StratScope does not resume any responsibility or liability for the same.