Brazil - The Next To Go ?

Brazil's Economic Slowdown And Protests Are Just The Beginning Of Its Problems

Brazil is pouring approximately $15 billion dollars into the 2014 FIFA World Cup and the 2016 Olympics.

The sporting events are expected to generate a combined 3.6 million temporary and long-term jobs and to boost GDP growth by 0.4% every year through 2019.

But after growing 7.5% in 2010, Brazil's economy grew just 0.9% in 2012. Q1 wasn't much better, with GDP rising 0.6% from the previous quarter.

At 6.5%, inflation is high and hurting real wages. Which explains why consumption grew just 0.1% in Q1. Meanwhile, the Bovespa is down nearly 28% year-to-date.

And all this has finally come to a head.
Deep rooted issues

Last month, Brazilians took to the streets over high costs around the World Cup and the Olympics. Protestors have largely become tired of poor public services, corruptions, and rising costs.

"There are deeper issues behind the riots, such as the erosion of income caused by high inflation, the bad quality of public services in general, and frustration of the “new middle class” about the lack of further improvement in living standards, despite high expectations generated  by the hype surrounding the Brazilian economy in the past few years," Deutsche Bank's Esteban Polidura wrote in a note to clients.

For many the idea of Brazilians protesting football is hard to wrap their head around.

"It is not the game itself that they have forsaken, but rather the kind of game that football has become: a billion-dollar business, a prestige object for louche plutocrats, and an extravagant showpiece for corrupt governments and international sporting organizations," wrote Ian Buruma in a Project Syndicate column.

And protests like the ones we saw last month are rare.

"The protests are very peculiar but I think are very relevant especially considering Brazilian history," Fernando Losada, senior economist at AllianceBernstein told Business Insider.

"Brazil is different from other countries in Latin America. You probably heard of the cases of Argentina, even Mexico, where people go out on the streets to beat pots and pans, to do the so called cacerolazo, to protest against the government. That's rather unusual in Brazil."
Investment on the decline

While the decline in credit-fueled consumption growth has been a large factor in Brazil's economic slowdown, so has the decline in investment.

After Dilma Rousseff took office, the government veered towards more interventionist policies hurting investment, Losada said. And the slowdown in the global economy hasn't helped either.

In an attempt to pacify protestors the government has made some changes. It rolled back the fare hikes that sparked the initial protests. It has since announced a bigger punishment for corrupt officials. Oil revenue will be channeled to improve education and healthcare, and Congress is considering a motion for a popular vote on political reform.

Major fiscal policy changes are unlikely ahead of the 2014 presidential election. After that, all bets are off. "In her second term, Dilma will have no horizon to be re-elected, and the attitude of the government may change then," Losada told Business Insider.

Monetary policy will likely be tightened to curb inflation and boost real income. To boost economic growth, the government will have to do more to attract investment. An improvement in the global economy will also go some way in helping GDP.

But even if that were to play out, Brazil has one other problem to contend with. Major sporting events have often had a negative longer-term economic impact on the host country.