Brazil's shrinking economy is facing Olympic-size troubles

A deep recession, political crisis, widespread street protests, reports of filthy waterways and a health emergency caused by the Zika virus mean the Rio Olympics come at a dire moment for Brazil.

When Rio de Janeiro was awarded the 2016 Games seven years ago, Wagner Bastos was a hotshot car salesman for Rio Citroen-Peugeot.

Some months he earned 17,000 Brazilian reais.

But Brazil's fortunes - and Mr Bastos' - have taken a tumble. His last monthly wage packet in June was for 1,400 reais - too little to cover his rent or school fees for his two children.

So Mr Bastos, 54, quit and started driving a taxi. "I needed cash urgently," he said.

In the past, hosting the Olympics often allowed newly prosperous countries to strut on the world stage and showcase their glitziest cities - Tokyo in 1964 or Seoul in 1988, for example.

And in 2009, when Rio won the competition for this year's Games, the picture looked similar.

Brazil's emerging market economy was sizzling - one of the world's economic superstars, along with Russia, India, China and South Africa.

But the Games come as Brazil is enduring myriad challenges.

"There have been political and economic problems in other (Olympic) host cities," says Andrew Zimbalist, an economist at Smith College who has studied Olympic Games. "But the combination here has probably been as foreboding as any I have seen."

Brazil's economy shrank 3.8% last year and is likely to contract an additional 3.3% this year, according to the International Monetary Fund (IMF). The economy was rocked by a plunge in prices for iron ore and other commodities it exports, partly as a result of slowing demand as China's powerhouse economy decelerated.

In the booming mid-2000s, Brazilians celebrated their collective arrival in the middle class by borrowing heavily to buy cars, fridges and iPhones. Now they face diminished livelihoods.

A political crisis has compounded the economic troubles. President Dilma Rousseff was suspended in May for allegedly violating budget laws. She is awaiting a trial this month in Brazil's Senate that will determine whether she will permanently be removed.

Business investment has been paralysed by an investigation into corruption at the state-owned energy giant Petrobras.

Once worth more in the stock market than either Microsoft or Wal-Mart, Petrobras has been reduced to selling assets - from oil fields to corporate subsidiaries - to raise cash to offset lower oil prices.

The Olympics might be making things even worse.

To prepare for the Games, the state of Rio spent heavily. When it ran into financial trouble, the federal government stepped in to help share the costs, thereby deepening the country's budget woes.

The Brazilian real has plunged 47% against the US dollar since Rio was awarded the 2016 Games in October 2009. The weak real makes imports costlier and helps escalate inflation, which was running at an annual 8.8% in June.

High inflation means Brazil's central bank cannot slash interest rates to boost the economy for fear of sending inflation even higher. As a result, the central bank has kept its key rate at a punitive 14.25%.

Nationally, since the end of 2014, more than five million people have lost jobs. Unemployment has nearly doubled to 11.3%.

The anaemic job market has depressed the property sector. Gone are the bidding wars for choice apartments in Rio's seaside neighbourhoods. Office rents plunged 6.1% in Rio from the fourth quarter of 2015 to the first quarter of 2016, making it the world's third-worst office market in that period, according to property firm JLL.

Leo Ickowicz, who is Brazilian but has worked for two decades in south Florida property, has experienced the transformation. At the height of Brazil's boom in 2010, when the economy grew a blazing 7.5%, many Brazilian clients sought to capitalise on the currency's strength to buy Miami property as an investment or holiday home.

Now, his firm is busier than ever. Inquiries have quintupled. But his clients have a different goal this time: They want to leave Brazil for good.

His company has had to add relocation services to meet the demand - everything from help in applying for visas and selecting schools to offering psychological aid to families victimised by Brazil's violent-crime epidemic.

Despite the litany of bad news, the Brazilian stock market has surged 30% this year. Investors have detected signs of hope.

Commodity prices have stabilised, and investors have expressed confidence in the economic policy team assembled by interim president Michel Temer, which says it will get government spending under control.

The IMF has also slightly upgraded its outlook for Brazil, predicting that the economy will shrink 3.3% this year, compared with its earlier forecast of a 3.8% contraction, and will return to growth in 2017.

Investors appeared heartened when the economy shrank just 0.3% in the first three months of 2016 from the fourth quarter of 2015. It was the best quarterly performance since the end of 2014.

But the economy was still 5.4% smaller than it had been a year earlier. And May retail sales were down 9% from a year earlier.

"I don't see where growth is going to come from," says Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. "People are still being fired. We do not know when the labour market is going to stabilise ... I do not see anything coming from consumption."

Ms De Bolle said that while she is impressed with Mr Temer's economic team, she wonders whether it can get its plans for spending cuts through a dysfunctional National Congress.

"The overall situation is still extremely murky and very, very uncertain," she said.

Mr Bastos is trying to adjust.

His wife's job at a construction company looks wobbly now that the massive building programme for the Olympics is drawing to an end.

He has stopped shopping at the supermarket in his middle-class neighbourhood and now drives across the city only once a month to pick up necessities at a wholesale market.

Family holidays are a distant memory and he thinks he will have to get used to a more modest lifestyle.

"This isn't something that we can fix in one or two years," Mr Bastos said. "It'll take Brazil at least 10 or 15 years to get back to where we were."


 

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