Months of drought during what is typically the nation’s rainy season has left Brazil – the world’s most water-rich country – unable to charge its hydro-electric dams.
“The next month is crucial for the reservoir levels in Brazil. More than 80% of the electricity is hydro. The problem Brazil is going through now is that reservoir levels are below where they should be given the country is in the middle of the rainy season,” said BlackRock’s senior LatAm portfolio manager Will Landers.
“There is a concern that as the country moves through the dry season there won’t be enough water in the reservoir to keep electricity at the minimum levels required.”
The government also relies on a network of thermoelectric power stations that is used as a back-up (to hydroelectric stations) but this is expensive and may not be enough if the drought is prolonged.
This, he added, would be bad news for Brazil’s president, Dilma Rouseff. “Given that Rouseff was previously the minister for mines and energy, this would be an embarrassment for her if Brazil had to go through that, especially as she is viewed as an expert in this field.”
Deutsche Wealth and Asset Management’s head of emerging market equities, South America, Luiz Ribeiro agreed, warning that any negativity surrounding the World Cup in Brazil could influence the election result in October.
“This government has spent a lot of money putting together the new stadiums and last year there were lots of protests against the spending of this much money, instead of allocating it to schools and hospitals etc,” he said.
“People have the perception that too much money was spent there and if for any reason something goes wrong and there is a problem with the infrastructure, it will be a problem for the current government. That could affect the outcome of the election.”
Standard & Poor’s cited the drought and costs associated with the rationing of power as a threat to growth and investment in Brazil when it announced the country’s foreign currency debt downgrade on Monday March 24.
Landers is confident, however, that the power supply to the stadiums for the World Cup will not cut out during matches.
“There won’t be a blackout at the stadiums. If you are sat at home or in a hotel then maybe, but the stadiums won’t be affected. Brazil has to make sure that all the infrastructure is in place and that it can repeat what happened in South Africa four years ago.”
But Nicolas Cowley, manager of the Henderson Global Emerging Markets fund, doesn’t share the same enthusiasm.
“It is a very important year for Brazil, one where they need to show that they can, in fact, run an event like the World Cup. Many people are not convinced they can given the problems they have had building the stadiums and the chronic infrastructure issues.”