A Potential Economic Rebound

To what extent can the Rio Olympics boost the Brazilian economy？By Sun Yanfeng

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A Potential Economic Rebound

To what extent can the Rio Olympics boost the Brazilian economy？By Sun Yanfeng

The author is Vice Director of the Institute of Latin American Studies under the China Institutes of Contemporary International Relations

Brazil， the largest economy of Latin America， has been suffering its most severe economic crisis since the 1930s as of last year. Despite the preparations for the Rio Olympics， the economy showed no signs of rebounding in the first quarter of 2016. In addition， a spate of bad press， such as the delayed delivery of Olympic venues，frequent public security issues and the panic caused by the Zika virus in the run-up to the Games， drew more international criticism. However， as the Olympics advanced， a shift began to occur， leading some to wonder whether the Games could really catalyze a Brazilian economic revival.

From rise to fall

When Brazil won the bidding to host the Olympics in 2009， the country became the frst in South America to do so. The ramifcations of the 2008 global financial crisis，felt so acutely in America and Europe， had little effect on Brazil at that time. In 2010，the nation posted economic growth of 7.5 percent and by 2013 the country had overtaken Italy to become the world's seventh largest economy， confirming its status as one of the major economic engines among emerging nations.

However， Brazil's high-speed growth didn't fundamentally alter its unbalanced economic structure. For many years， its economy has been overly reliant on domestic consumption and exports of raw materials， such as iron ore， soybean and crude oil. In the meantime， the country's growth is hampered by high taxes， high labor costs， high infation and poor infrastructure. Therefore， when bulk commodity trade prices of things such as iron ore collapsed，the Brazilian economy began to suffer.

Since 2014， Brazil's consumption， exports and investment figures have sunk to new lows. Domestic consumption growth has dropped from 10 to 2 percent， while prices of products such as crude oil， soybean，iron ore and sugar have dropped between 13 and 67 percent， leading to a trade defcit from a previously handsome trade surplus.

While exports and tax revenues have shrunk， government welfare spending has increased， resulting in a rapid surge of public debt. The state's ability to regulate its economy is questionable. Given the unfavorable global economic climate combined with the domestic economic downturn，a recession was almost inevitable. The Brazilian economy expanded a mere 0.15 percent in 2014， while it contracted by 3.8 percent in 2015 and is forecast to decline 4 percent this year.

Compounding the economic woes is the ongoing political crisis. President Dilma Rousseff of the Workers' Party was accused of corruption in 2015. On May 12 of this year，the Brazilian Senate temporarily suspended Rousseff of her powers and duties for up to six months， with Vice President Michel Temer serving as acting president. Quite a number of big and medium-sized enterprises were accused of being involved in Rousseff's corruption charges. Against this backdrop ofeconomic and political turmoil，a lot of apprehension greeted the Rio Olympic Games.

A bird's-eye view of the key area of the Rio Olympic Park on June 26， 2015

A new dawn？

However， indicators released during the Olympics suggest the economy may be rebounding. Statistics for Brazil's economic outlook in 2016 are better than expected. Carlos Hamilton， Secretary of the National Treasury， recently revealed that projected economic decline would be readjusted from 4 percent to 3 percent，or even lower. The country is expected to return to growth next year at a rate of around 1.6 percent. After two years in recession， such expectations should boost the confdence of foreign investors and domestic consumers.

The appreciation of the Brazilian currency， the real，underlines increasing investor confdence. The exchange rate of $1 equaling 4 real has shifted to around 1 against 3.3， refecting the renewed international faith in the Brazilian market. In addition， domestic consumer confidence is on the rise， with the nation's Ibovespa stock index growing 35 percent this year. Inflation has also dropped from 7.2 to 5.4 percent， and is expected to return to a stable 4.8 percent next year.

Since the second quarter， the debt default rate has begun to decline， which is possible evidence of increasing household consumption. Industrial recovery appears to be on the horizon. The automobile industry， which accounts for a high proportion of Brazil's industrial output， has returned to growth after years of decline. Business insiders claim that the rise of the three major economic indicators， including foreign investor confidence， domestic consumer confidence and business confidence forecast a rebound for the country's economy.

It is widely believed that three major factors underpin a potential recovery. First，Brazil's cyclical downturn has hit rock bottom， and it is time to rebound. Second， the current global economic situation is relatively stable. A recent report published by the World Bank shows， since the beginning of this year， bulk commodity prices from beans to diamonds have been staging signs of recovery. The worst days for bulk commodity exporters have passed.

A Brazilian athlete lights the Olympic torch on top of the Corcovado Mountain on August 5 in Rio de Janeiro

China， in particular， Brazil's largest trading partner and raw material importer， has maintained stable and moderate economic growth. In addition， China's structural reform should realize greater potential growth， helping to stabilize market confidence in the Latin American giant. Third，the Olympic dividend has spurred huge investment and business opportunities. Offcial data from the Brazilian Government show that total investment on the Rio Olympic Games was around $11 billion，of which $2.2 billion was used for the operation of the Games， $2.1 billion for infrastructure construction projects such as subways and roads， and about $7.5 billion for environmental improvements and city transportation. These investments will play a key role in driving the country's economic growth. At least 50 industries can potentially benefit from the Rio Olympic Games， of which the infrastructure construction industry， including highways，subways and airports， can beneft by more than 10 percent. In the short term， the 500，000 or so foreign tourists should generate large revenues too. More importantly， the improvement of the logistics and services can bring Rio and other cities long-term benefits as they lay the groundwork for future economic expansion.

Uncertainty remains

Despite promising signs， some international investors still doubt the substance of Brazil's projected recovery. Before the Rio Games， international rating institution Moody's claimed any increased tourism revenue generated by the Games could not drag Brazil out of recession.

The base for economic recovery is not that solid. Though Brazil's major industrial， agricultural and financial sectors haven't collapsed during the recession， growth impetus remains weak. Whether the Rio Games can inject a long-term spark or is just a short-term boost remains to be seen.

Brazil is also unlikely to be able to solve its political struggles in the near future. President Rousseff will be ousted if she is found guilty in the pending impeachment trial， paving the way for Temer to assume full-time presidency. However， the nation's left-wing will not give up easily， leading to more political instability. Eyes are focused on October's election，a precursor to the 2018 General Election. Handicapped by election campaigns and against a tidal wave of leftist resistance，administrating bold and resolute economic reforms may be diffcult for Temer.

Finally， no fundamental changes have been made to address Brazil's flawed and unbalanced economic structure. The multiple economic recovery initiatives such as the industry recovery plan， infrastructure construction investment plan and technology innovation plan launched by recent administrations have not been well executed due to various restrictions. If the Brazilian Government sticks to its traditional “findit and fx-it” mentality， the economy will be unable to avoid another recession despite signs of expansion. Therefore， whether the country can reform its industrial structure and economic system will be a crucial test of its long-term economic health.

Copyedited by Dominic James Madar

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