Brazil's shrinking economy is facing Olympic-size troubles

AP , Thursday 4 Aug 2016

Rio de Janeiro, Brazil
Rio de Janeiro, Brazil (REUTERS)

When Rio de Janeiro was awarded the 2016 Summer Olympic Games seven years ago, Wagner Bastos was a hotshot car salesman for Rio Citroen-Peugeot. Some months he earned 17,000 Brazilian reais - about $5,200 now and much more back then.

But Brazil's fortunes - and Bastos' - have taken a sickening tumble. His last monthly paycheck in June was for 1,400 reais ($425) - too little to cover his rent or school fees for two children. So Bastos, 54, quit and started driving a taxi.

''I needed cash urgently,'' he says.

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

And in 2009, when Rio won the competition for this year's Summer 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 '16 Games come at a dire moment for Brazil, which is enduring myriad calamities: A deep recession. A political crisis. Widespread street protests. Reports of filthy waterways. And a health emergency caused by the Zika virus.

''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 percent last year and will likely contract an additional 3.3 percent this year, according to the International Monetary Fund. The economy was rocked by a plunge in prices for iron ore and other commodities it exports, partly 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, refrigerators and iPhones. Now, like Americans after the devastating 2008 financial crisis, 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'll be permanently ousted.

Business investment has been paralyzed 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 percent against the U.S. dollar since Rio was awarded the '16 Games in October 2009. The weak real makes imports costlier and helps escalate inflation, which was running at an annual 8.8 percent in June.

High inflation means Brazil's central bank can't slash interest rates to juice 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 percent.

Nationally, since the end of 2014, more than 5 million people have lost jobs. Unemployment has nearly doubled to 11.3 percent.

The anemic job market has depressed real estate. Gone are the bidding wars for choice apartments in Rio's seaside neighborhoods. Office rents plunged 6.1 percent 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 the real estate firm JLL.

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

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 victimized by Brazil's violent-crime epidemic.

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