The Brazilian economy faces an uphill battle – and the Olympics won’t win that, whatever people may hope
Pope Francis enjoyed a pop star reception during the World Youth Day in Rio last July during his first trip abroad as pontiff. But the Argentine clerics visit showed the world how difficult it still is to organize large events in Brazil. His driver got lost between the airport and downtown Rio, and a tumultuous crowd immediately surrounded his car, potentially putting his security at risk. Then a large mass that was due to be held in a popular suburb had to be relocated to Copacabana because the original site, which was built on a marsh, flooded. The last minute change of plans cost the Catholic Church dearly: it had to sell some property (a Rio hospital) to pay its debt.
The population also took advantage of the presence of the global media to protest against the government, the poor quality of public services and corruption. Social unrest has since abated, but Brazil will remain at the centre of global attention in the coming months and years amid widespread economic uncertainty. Next years football World Cup will take place three months before the presidential election. Two years later, Rio de Janeiro will host the summer Olympic Games.
The government has seen this as an opportunity to invest in infrastructure and improve urban mobility, but the cost of such global events will also be scrutinized. Analysts say that hosting the Olympics will give Brazil confidence. Brazil has been suffering from a chronic deficit of confidence for several years, irrespective of who has been in government. This is because, historically, Brazil has not shown a commitment to long-term reforms. A successful investment cycle in infrastructure may contribute towards reducing such a deficit, says Octavio de Barros, chief economist at Bradesco, a large Brazilian bank.
Brazils infrastructure is currently built on shaky ground. Poor transport has been a drag on the countrys competitiveness for decades. The Latin American giant ranks 71st in the latest ranking of the World Economic Forum in terms of infrastructure, and 56th overall in terms of competitiveness (out of 148). Brazils macroeconomic record has deteriorated, in terms of debt and primary budget surplus. The labour legislation and the Doing Business issues have not been addressed, says Carlos Arruda, from the Fundação Dom Cabral, one of the Brazilian contributors to the WEF research. The perception of the business community is very negative as far as basic infrastructure is concerned.
In order to change this, the government has put together an ambitious package of public-private partnerships. However, it seems to have stumbled at the first hurdle: last month, private groups failed to present any bid for a stretch of road that officials considered to be one of the most attractive for investors. And some major oil companies, such as Exxon Mobil, Chevron and BP, preferred to stay away from the first auction to explore the ultra-deep water pre-salt reserves in the Libra field, which is scheduled for October 21.
Gabriel Rico, the president of the American Chamber of Commerce in São Paulo also deplored Brazils decision to call off President Dilma Rousseffs planned state visit to the US as a missed opportunity to boost American investment in the trade flows with Brazil. The Brazilian president was due to travel to Washington later this month, but the visit was postponed indefinitely after the emergence of allegations that the US National Security Agency had monitored the Brazilian presidencys phone calls and spied on state-owned oil company Petrobras.
The main impact will be to stymie a momentum that was building in the bilateral relationship, says Chris Garman, Latin America director at Eurasia Group in New York. For portfolio investors, it will have no impact as it doesnt change their perception. But for direct investors, the impact will be more on IT and communications (ITC) and some on oil and gas. For ITC it will impact the governments policy in the sector, so it will make the investment environment more difficult. But it wont have much impact on overall FDI.
A preview of the World Cup-related investment is also disappointing. It looks like the football stadia will be ready, but the urban transport that was supposed to be part of the positive legacy of the event will not. Only 12% of the urban mobility package will be ready on time, even with the inclusion of these investments in the official Programme to Accelerate Growth (known as PAC), says Iure Pontes Vieira, a São Paulo lawyer.
Twelve stadia have been refurbished or built from scratch across the country, including some in cities that have little tradition in football, and which may well become useless once the event is over. The overall cost has more than trebled since the original estimate of $1.1 billion. Over two-thirds of the investment will come from the public purse. Tax breaks conceded by Brazilian officials or demanded by FIFA (Federation Internationale de Football Association) will amount to 900 million reais (around $400 million), says Pontes Vieira.
Meanwhile in Rio, a new business-oriented municipal company was put in charge of planning the future of the city until the Olympics. Its president, Maria Silvia Bastos, a former CEO of the CSN steel company, says she relies on public-private partnerships, although she says it is not yet possible to estimate what will be the share of private investment in the whole package.
On the ground, the situation is mixed. Job market statistics still point to near full employment, inflation is high, but economic activity is sluggish. To make matters worse, the fiscal accounts have been deteriorating, and business confidence has become elusive. The population, once passive, increasingly questions the poor quality of public schools and hospitals. The rallying call of mass demonstrations last June was a protest against a bus fare increase, but the movement took another dimension when protesters climbed on the roof of the Congress building in Brasilia, and one million marched in downtown Rio. The demonstrations later extended to the Confederations Cup, which is a trial run before the World Cup, before losing intensity.
President Rousseff, who is frequently criticized for being too distant from the people, acknowledged the general malaise of the population and vowed to improve public services while preserving fiscal discipline. But the current social crisis is a big blow to the pro-development strategy that has been pursued by the government since 2006, according to André Singer, a political scientist at the University of São Paulo. The date coincides with the arrival of Guido Mantega at the finance ministry. Mantega has since implemented a development agenda, including countercyclical policies during and after the global financial crisis. According to Singer who was a spokesman for former president Lula a pact was agreed in mid-2011 by the government, the local business leaders from the Federation of Industries of the State of São Paulo (FIESP) and the two main trade unions to change the course of economic policy.
The pact included lower interest rates, an increase in productive investment and interventions on the foreign exchange markets in order to boost the local industry, which was threatened by an overvalued currency. In August 2011, this is exactly what Dilma did: the central bank started to cut interest rates... Banks came under public pressure to reduce spreads in 2012 in order to allow new investment at accessible interest rates. It [the government] intervened on the foreign exchange markets, it taxed speculative capital flows. The government seemed to be on the side of the productive coalition, says Singer. The orthodox pillars of economic policy (fiscal discipline, inflation targeting regime, and a free floating exchange rate) were challenged.
The government implemented the measures that were on the agenda of business leaders, but investment failed to materialize, according to Singer. The results were disappointing. Last year, the economy stalled, Brazil experienced zero growth per capita, and the investment rate declined. It was a big blow to the development and
interventionist agenda.The situation can be reversed if Brazil manages to grow again. If not, it is going to get tough, says Singer. Private-sector economists and the IMF reckon GDP growth will not exceed 2.5% this year. Now, investors seem to be lukewarm again, regarding the infrastructure programme. The government is behind the curve, but it is almost getting there, says Antonio Delfim Netto, a former finance minister and informal adviser to President Rousseff.
Brazil, as one of the biggest emerging markets, has also been in the global spotlight due to the looming end of quantitative easing. Foreign investors are increasingly likely to pull out from countries with relatively high current account deficits, such as Brazil (3.4% of GDP in July). But the president of the Central Bank of Brazil, Alexandre Tombini, is satisfied that the swap and repo programme he engineered last August (injecting some $3 billion per week in the markets to see through the transition period) will help Brazil find a new balance.
We were sort of leaning against the wind when the markets became stressed with this prospect of exit, Tombini says. We stepped in and provided predictability... Basically, we took some duration off the table, so making things a bit easier during the more volatile days and weeks that we had to endure. So this gives you a flavour about the capacity of Brazil to navigate through these more turbulent waters when they occur, and this gives you a prospective view on the fact that Brazil has the capacity and will continue to implement these kinds of policies to cruise through this period ahead when volatility comes back.
Brazilian policymakers are once again confident that they can show the world that their country is resilient and able to adopt the course of a normalizing global economy. World class events will keep the Latin American giant in the spotlight for at least another three years. This is certainly a privilege, but the economic and financial stakes are very high. While many analysts say it is hard to see how things could go very wrong for the Brazilian economy, political uncertainty and state interventionism may still spoil the investors party.