Can Brazil Afford the Olympics?
It’s October 2009. The United States is suffering through the fallout of the Great Recession with unemployment above 10% and we’re still trying to figure out what an Obama presidency is going to look like. Meanwhile, in South America, Brazil was vying to host the Olympic games after securing the World Cup two years prior. It’s no longer 2009 though and Brazil has gone from boom to bust. Now the question has to be asked, can Brazil afford the Olympics?
Brazil’s economy was one of the most robust in 2008 as it revived very quickly after the United States fell. However, the optimism faded quickly in 2012 when consumer debt began to catch up and households started spending 20% of the take home pay on just servicing the debt. Right now, credit card rates for Brazilians are in the 400-500% region, making the United States 22% starter cards look like a steal. Consumer spending began to dip and took Brazil’s positive outlook with it. Brazil is now in an economic depression with five quarters of negative GDP and a 10% total contraction since 2011. The Olympics are now being touted as an economic cure-all, but can Brazil afford the Olympics? This medication looks increasingly tough to swallow.
A Brazilian Nightmare
A quick look at the Rio2016 web page, ironically labeled Transparency, notes that expenses were supposed to match revenues at 7.4bn reals (about $2.1bn USD). The latest total budget sits at 39.1bn reals (about $10.8bn USD). This is after a flurry of budget cuts to the Olympics – cuts that include not placing a permanent “pacification force” in the Brazilian Favelas (for those that don’t know, Favelas are the slum cities that were created by the Brazilian homeless. They’re usually controlled, and policed, by local drug syndicates through violence and intimidation) as well as not cleaning and purifying Guanabara Bay. Guanabara Bay is where the water sports should be taking place; it’s also the same body of water that Brazil dumps sewage and waste. While the expenses are staggeringly high, it’s not to be unexpected. A study out of the University of Oxford in 2014 found that since 1968, the Olympic games have gone over budget 100% of the time by an average of 179% in REAL terms; with inflation added, the budget’s ballooned by 324%. These costs, aren’t necessarily a catastrophic issue when you have an established country like China or England hosting, but Brazil is just recently considered a standard player in the international economy – a title they’ve all but lost given their current economy. Overages of this magnitude are lethal for developing countries. This can be seen in everyday life. There are masses waiting outside hospitals everyday seeking treatment; in one report, a woman was forced to give birth on the sidewalk as the hospital turned her away because they couldn’t afford to keep her. Brazilian citizens are going into labor in city streets; athletes are having to go without TV’s in the Olympic village. The turmoil seems one sided and unfair. Can Brazil afford the Olympics?
A Political Economy
Brazil was recently downgraded by all the major credit bureaus. They are, once again, considered junk status. Having such a low investment status while also needing to take on the funds (remember, Brazil had a 10% budget deficit in 2015) means they pay around 15% interest on loans. That 15% interest becomes killer when your country has 66% debt to GDP. This becomes more crucial as the Olympics draw even closer and the stadiums aren’t finished. Brazil is being forced to pay contractors exorbitant rates to hurry production, they’re being forced to shell out money to continue to try and clear out the Favelas, forced to upgrade old infrastructure and all of it is on a rushed schedule.
And what is the president doing? Well, President Dilma Rousseff is currently suspended and facing impeachment. Her interim president just had two members of the executive cabinet resign for a corruption scandal. So, ultimately, the president, whichever one you choose, is really doing nothing. Frankly though, there is nothing to do. Brazil just hosted the World Cup and spent a great deal of money on it – the coffers are empty. Not to mention the economic depression they’re in means tax revenues are falling and consumer confidence is plummeting. But the major catalyst, the major reason there is no money in the government is oil. Brazil receives a great stipend through revenues of Petrobas, their national oil company. With oil at $50 a barrel, that golden goose has stopped laying eggs and like Venezuela, Brazil never diversified their income streams. Of course, just like Rousseff and her cabinet, Petrobas is entrenched in the turmoil because they were the one giving kickbacks to the Executive cabinet. Ouch.
The equity in Brazil seems low, and it is. A measure in economics called the Gini Coefficient attempts to measure wealth inequality – 0 would be perfectly equal and 1 is completely unequal. Brazil ranks 17th in the world and measures a .519 according to the CIA Factbook. That’s actually exceedingly high. For comparison, the United States is 44th at a Gini of .45. I would argue it’s more pronounced in Brazil though as Favelas dot the countryside and outside of places like Sao Paulo and Rio de Janeiro the poverty is palpable. However, Brazil has placed themselves between a rock and a stadium. The traditional view is to increase deficit spending and lower taxes to curb a depression; however, due to borrowing costs and earmarked spending requirements, they can’t afford to lower their revenues any further. Inevitably though, due to the inequality, the losers are the Brazilian people. History shows it’s always the Brazilian people. So can Brazil afford the Olympics? Absolutely not. Not from a financial, ethical, or prestige standpoint.
Readers, what do you think of the Brazilian crisis? Does it dampen your excitement for the upcoming Olympics? I didn’t mention it in the article, but Brazil is also the breeding ground for the Zika Virus and Dengue Fever. Just another line item in the long list of reasons why Brazil hosting the Olympics was a terrible idea. As always though, if you enjoyed the article be sure to ‘like’ Cash Flow Celt on Facebook and share the article with your friends.