If there’s one myth that should be severely laid to rest, it’s the ridiculous levels of investment needed to host an Olympic games can revive a failing economy. Brazil’s economy has been in trouble for years, yet recently there has been signs of recovery.
There are obviously many economic indicators which can suggest the future prospects of an economy – however often one of the most reliable is the quite simple measure of economic activity. It doesn’t always suggest improvement, often activity can indeed be the precursor to very bad news but for a country in malaise like Brazil – increased activity is something that is essential for recovery.
The last few months in the UK after Brexit – the measure has predicted a heading back towards recession, economic activity has plummeted while businesses and investors try and figure out what’s going on. One of the main issue in Brazil is debt, and the President’s economic team has made this a priority.
As I sat and watched the BBC’s Olympic coverage last night of the opening ceremony – I and many were impressed not just by the spectacle but by the obvious restraint in budget. An economy with huge debts will do itself no favors by displaying no sense of the value of money. Remember not that long ago Greece through a lavish spectacle at the Olympic games too, it turns out that the money spent wasn’t even theirs. The Olympics will not help the Brazilian economy but a responsible attitude to the costs involved may just pay dividends.
There needs to be a serious improvement in macro-economic outlook in Brazil, to reduce the cost of the equity. There is no doubt that Brazil and neighboring countries offer attractive investment opportunities as long as there is some stability in the economy and the Brazilian bond markets.
The Olympic games always lose money despite what anyone says, and this can be very painful for smaller and developing nations. According to the world news, the Rio Games are costing over $10 billion which is relatively modest in comparison to some recent games. There are long term benefits and of course these can be assigned an economic value but overall the Olympics usually cause more problems that they solve at least in the short term.
The feel good factor in Brazil could go a long way though and hopefully these small improvements in economic activity combined with more sensible macro-economic policies could lead to a recover sooner rather than later.
It doesn’t seem so very long ago that we were discussing the economic successes of emerging nations like Brazil. From Europe we looked across at huge growth rates, rising living standards and a vibrant economy with a sense of extreme jealously.
However Brazil is now facing much bleaker economic prospects and it is a prime example of how quickly market sentiment can turn against an economy. The risks were always there, in this blog we highlighted here the fact that much of the success in Latin American countries was due to US economic policies – which meant that there was always a lack of genuine fundamentals underlying the growth. Much of the investment in these emerging countries was simply driven out of the US and Europe by very low interest and bond rates, when stability returned then the investment dried up in places like Brazil too.
The economic prospects for Brazil continued on a downward slope with this weeks decision for the credit rating agency Moody downgrading Brazil’s sovereign debt status to junk. The decision in itself will have little consequence, partly because it was anticipated and had largely been already priced into the markets. That’s not likely to be much relief though, more simply a confirmation of the bleak prospects of the Brazilian economy as a whole.
The reality is that Brazil has simply been spending too much with huge levels of debt and an ongoing fiscal deficit making it even bigger. As always in these situations, the talk is of a debt default which could be the catalyst for even more pressure on the country’s currency and a deepening recession.
Only a few years ago Brazil’s economy was growing at over 4% a year, whilst many other economies in the world were basically stagnant. Now that growth has been reversed and this year it is expected that it will contract by around 3-4% this year. This would represent Brazil’s worse recession in more than a hundred years, and with little indication of a turnaround the deficit is likely to increase.
The political situation is also unlikely to offer any relief for Brazilians, which desperately needs strong policies to deal with the economic crisis. However if you invest a few short minutes in looking at the Brazilian media online, possible with an online IP changer then you’ll see that there’s little sign of this happening. As one correspondent highlighted, the report by Moody’s is like a medical report which states the patient is sick yet is maintaining the same lifestyle which caused the problem.