In the Midst of a Crisis… Brazil Throws a Party

Brazil is in economic and political crisis.

The president has lost popularity because of a corruption scandal and economic reform.

Brazil’s leader asked the people to show their support. People took to the streets, but not as expected.

The masses are not wearing traditional flag colours (blue, yellow and green). Instead, they wear black…as a sign of mourning for the country. The plan has backfired.

They don’t chant the president’s name. They cry ‘Impeachment Now’.

It’s 16 August 1992.

Brazil’s leader is Fernando Collor de Mello.

The drama started a few months earlier. During an exclusive interview, Collor’s own brother accused him of political corruption.

The interview started a political trial that led to him leaving office. He is the only President in Brazil’s history to have been impeached…so far.

14 years later, Brazil faces a similar situation. The country is in economic crisis. The president, Dilma Rousseff, is suspended and is facing a political trial that could last six months.

But Dilma is not on trial for corruption. She is accused of hiding a deficit in the public accounts to pump the economy.

Ironically, the only other person in the country who knows how Dilma feels is one of those who will be deciding her fate. Collor de Mello is now a senator for the small state of Alagoas.

2009 was a very different time for Brazil. Rio de Janeiro had just been chosen to host the Summer Olympics in 2016. The country was full of economic promise.

Now, Brazil is in deep trouble.

It’s probably the worst time to host the Olympic party.

Like Australia, Brazil was hit hard when commodity prices fell.

Corruption also added to the recession. The Federal Police of Brazil’s ‘Operation Car Wash’ implicated many members of the government, alongside business giants like Petrobras and Odebrecht.

Unemployment is rising, and there will be budget cuts. Just to top it off, there’s also the Zika virus.

The Olympic Games could make it all worse.

According to the study ‘Going for the Gold: The Economics of the Olympics’, the Olympics have always been a bad investment for the host.

It’s argued that hosting the Olympics has three important benefits.

The first is that the games bring an increase in tourism during and after the event. Barcelona and Salt Lake City are two examples this.

However, no other cities have been able to get the same results. It could be because Barcelona and Salt Lake City were not considered attractive destinations before the games.

Rio de Janeiro is already a popular tourist destination. It’s known for its weather, beaches, attractions and carnival. It’s very likely that the Olympics will not affect Rio’s tourism.

Another benefit is the infrastructure left after the games. Mostly transport, stadiums and hotel rooms.

Brazil is a football crazy country. They have a lot of stadiums. But regular stadiums won’t do. Olympic stadiums need to be able to host all the competitions and have room for viewers.

The argument is that future generations will benefit from these. The reality is that most of these stadiums are generally not used after the event. They became an expense for the government.

In 2014, Brazil hosted the World Cup. There were 12 stadiums built or renovated for the event. Only a year after, eight of those stadiums were in deficit.

The Maracana, in Rio, had the biggest losses. The problem is the costs of running the stadium are very high. It’s so bad that the company managing the stadium, Odebrecht (yes…the same company involved in the corruption case) wants to give it back to the government.

More than 1.5 million people visit Rio every year. The city still had to build 15,000 new hotel rooms. Will they be filled after the Olympics end?

A large part of Brazil’s tourism comes from Argentina. There’s a popular saying: when Brazil sneezes, Argentina gets sick. Well, Brazil has sneezed. If Argentina falls ill, Brazil’s tourism industry will be affected.

Brazil’s current Olympic Games budget is around US$10 billion. But the final number could end up being much more. Since 1968, every Olympic city has gone over budget.

It’s quite an expense for just two weeks. The more over the budget it goes, the more risk that the benefits may not cover the costs.

The World Cup had little or no effect on the country’s economy. It’s true that tourism increased during the event. But industry production decreased with so many holidays. The automotive industry was one of the biggest losers, with a 33% fall in production and a 17% decrease in sales for the month of June.

The last benefit is the pride of hosting the Olympics. We all know how that worked out for Brazil after the World Cup. The event left a bitter taste after the 7-0 defeat against Germany.

Brazil is taking a gamble by hosting the Olympics. Let’s hope the ‘party’ doesn’t become an expensive regret.

Selva Freigedo


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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