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THE INVESTOR
market focus
brazil
The sense of carnival
that has accompanied
Brazil’s economic
progress may nowbe
a thing of the past
pension age, changing labour laws and cutting
red tape, have been postponed while public
spending – including onWorld Cup
preparations – has been lavish.
While quantitative easing (QE) kept US
interest rates low, it increased the attractions of
emerging market currencies offering higher
returns. Last year’s news that QE would be
reined in – or‘tapered’ in the official jargon
– prompted outflows of capital from currencies
like the real.Amore realistically valued – i.e.
weaker – real is ultimately a good thing, but it
has raised the cost of imports and, with it, the
old Brazilian evil of inflation.
Rousseff has done everything she can to keep
prices down, abolishing fuel duty, lowering
taxes on certain foods and cutting electricity
prices. Public transport fares were lowered after
a proposed hike in bus fares last year set off
nationwide, and sometimes violent protests,
against poor public services and government
corruption. Spending on theWorld Cup took
some of the brunt of public anger –‘Cup for the
rich, scraps for the poor’ is a popular slogan.
Inflation hit 5.9% in 2013 and economists
say that without government interventions it
would have topped the central bank’s 6.5%
upper limit. Some believe it will do so soon,
and one forecast is for interest rates to hit
10.75% by the autumn
3
.
Against this backdrop, infrastructure
preparations for the forthcoming football fest
have not progressed well. Rousseff has
promised‘the Cup of Cups’, but even FIFA
president Sepp Blatter says that Brazil started
much too late. Six of the 12 promised new
stadia are still unfinished and most are running
over budget.The Curitiba stadium, for
example, which narrowly escaped removal
from the tournament by FIFA because it was so
far behind schedule, is reportedly 78% over
budget. Completion of the São Paulo stadium,
where the opening game is to be played, was
delayed by a fatal crane accident. It may be
ready only six weeks before match day.
The stadia were originally supposed to cost
less than $1 billion.That has escalated to
more than $3.5 billion and the final cost
(including infrastructure) will be more than
$14.5 billion, according to Bloomberg.
Germany spent just under $2 billion on stadia
for the 2006 tournament, while SouthAfrica
spent $1.5 billion (see box, right).
No one disputes the magnificence of some of
the facilities, but there are questions over their
long-term usefulness.With small home
crowds, the gleaming new stadia in Manaus
(halfway up theAmazon River), Brasilia,
remote Cuiabá and Natal seem destined for
eventual white elephanthood.Worse, they may
still have to be expensively maintained, like
Beijing’s $480 million‘Bird’s Nest’ stadium,
which lacks a tenant but costs $11 million a
year in upkeep.
It’s worth noting that many of the transport
improvements planned to coincide with the
tournament, including road improvements and
airport expansions, will not be ready in time or
have been scrapped altogether. Given the sheer
size of Brazil and the vast distances between the
different venues, this may come back to haunt
the tournament hosts.
Then, hot on theWorld Cup’s heels, we have
the 2016 Olympic Games.The bid document
for the Rio Olympics itemised another
$10 billion in spending.Of course,Olympic
budgets are notoriously prone to inflation over
time – London’s first figure for the 2012
Games had to be more than tripled.
There remains a risk that theWorld Cup
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THE INVESTOR
