This month, Brazil is hosting the FIFA World Cup and all eyes will be on an economy that has been experiencing a period of relative economic disappointment.
In the past decade, Brazil’s economy has grown by 44% in real terms. This is a substantial increase, but it is the slowest in the BRIC group (Russia, India and China grew by 48%, 105% and 164% respectively). As Figure 4 shows, most of that expansion came prior to the financial crisis. Growth since then (apart from 2010) has been sluggish at less than 3%. We expect growth to be 1.8% in 2014, continuing this trend.
A key soft spot for the economy has been its lacklustre export performance. In the 7 years prior to the financial crisis, Brazil’s exports grew at an average annual rate of 10%, but in the past 6 years they have grown at only 1.7%. This slowdown has been a key driver of its worsening current account deficit (see Figure 4). Brazil’s exports have been hampered by a volatile exchange rate, driven in part by investor risk appetites and cheap dollar flows stemming from the Federal Reserve’s QE policies.
Brazil also faces domestic challenges. Public sector intervention in the economy is extensive, but problems with policy co-ordination and supply side constraints mean initiatives often under deliver or distort markets (for example, fuel price subsidies have caused problems for its bio-ethanol industry). The private sector also contends with a difficult regulatory environment - Brazil ranks 116th in the World Bank ease of doing business index and 22nd out of the 32 Latin American economies.
Against this backdrop, could the upcoming World Cup (and Olympics in 2016) act as a catalyst for the economy? The evidence is mixed as to whether “mega-events” bring substantive economic benefits, but we think there is the potential to realise some intangible but important benefits:
The global showcasing that key host cities achieve could pave the way for the next wave of FDI into Brazil if successfully leveraged. For example, a 10% boost to FDI would translate to an additional $6.5bn injection into the economy. There are some indications that Brazil has been taking steps to maximise the gains in this area. The country’s export promotions agency has scheduled a showcase program for over 700 Brazilian companies to international investors next month.
Additionally, the experience that local companies accumulate through hosting these mega events could be used in the future. For example, on the back of their experiences of London 2012, UK companies have sold £130m as part of Brazil’s 2014 and 2016 hosting preparations.
Fundamentally, any benefits to Brazil from hosting these mega events will be affected by the perceived successes or failures of infrastructure and logistics in the economy. Although recent headlines have not been encouraging in this regard, with the Olympics following in two years, for Brazil this is a game of two halves.
World cup index
Fig 3: Our analysis shows that Brazil is the biggest overachiever at the World Cup, while the USA is the biggest underachiever
Fig 4: Since the financial crisis, Brazil has seen a period of sluggish growth and a worsening current account
Source: PwC analysis, IMF
Fig 5: Confidence levels have been falling while the exchange rate has been weakening
Source: PwC analysis, Datastream
Fig 6: FDI into Brazil has been increasing in the run up to the World Cup