World Cup 2014: no panacea for Brazil's woes
For this edition of Macro: The Bottom Line, we shift gears from
ECB policy to what'll be on the minds of millions around the world for
the next four weeks - the FIFA World Cup in Brazil. Well, not exactly
the teams or the play-by-play recaps - for that you'd have to go over to
ESPN. Rather, we'll give you some background on the host country
itself.
From a public relations perspective, the lead-up to the
World Cup has not been kind to Brazil at all. The country has been
getting a stream of bad press for months: the snail pace of construction
work on stadiums and infrastructure, cost overruns (the 12 stadiums
together ended up costing three times the original budget), concerns
about rising crime, and a wave of strikes (including a walkout by the
ground crew at Rio's international airport on the World Cup's opening
day).
At the same time, on the macro front, things finally
appear to be turning a corner for Latin America's largest economy. For
one, the country's equity and fixed-income markets have come roaring
back from a shaky January - the country's benchmark Ibovespa stock index
is now up around 9 percent year-to-date Likewise, the Real currency has
been on a tear, advancing by almost 9 percent since the end of January.
What's more, global financial market conditions have stabilized to such
an extent that the central bank could afford to pause its rate-hike
cycle.
So, which version represents the "true" state of
affairs in Brazil: the press version of organizational disarray and
violent street protests, or the market version of fast-recovering
financial asset prices? The answer is, both.
There's no denying that Brazilian markets have been
stellar performers this year. But so have markets in Spain, Greece,
Turkey ... the list goes on and on. That's because the catalyst for the
euphoria has nothing to do with virtuous government policy in Brazil.
Rather, it has to do with - you guessed it - the Fed and the ECB
recommitting themselves to accommodative monetary policy. With the era
of easy money set to continue, the yield seekers are back doing what
they do best: indiscriminately pumping up valuations in emerging-market
assets. And Brazil - with some of the highest inflation-adjusted yields
in the world - inevitably benefitted from this trend.
Domestically, however, the situation is far from rosy. The
problems that the World Cup has brought to international attention, are
symptomatic of broader structural issues that are increasingly
strangling Brazil's growth potential. Cost overruns and delays in
completing stadiums? These are nothing new in a country where the
bidding process for infrastructure projects is opaque, bureaucratic, and
plagued by corruption. Widespread street protests? Not surprising in a
nation that taxes its citizens at Western European levels, but in return
delivers potholed roads, Third World education and healthcare, and
inflation north of 6 percent. Elevated crime levels? Hardly shocking in a
society where - due to poor education standards, low productivity, and
absurdly high costs of doing business - high-paying jobs and
opportunities for entrepreneurship are increasingly hard to come by. The
opportunity cost of crime is enticingly low.
These problems have existed for decades, and can only
be addressed by resolute action by political decision-makers. Instead,
these very political leaders continue to waffle, in the hopes that these
issues will somehow dissolve amid the generosity of global central
banks and the convergence of global soccer teams on the world's biggest
sporting event. But once the whistle blows on the last World Cup game on
July 13, Brazil will be back to where it started (oh yes, and 12 empty stadiums "richer").
Keep this in mind the next time someone tries to justify an investment in Brazil using the World Cup ...
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