Saturday, October 3, 2009

Brazil's economy on the rise

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The big news yesterday was that the 2016 Summer Olympics were awarded to the city of Rio de Janeiro. I say good for Rio, congratulations!

A lot of the media coverage around this story in the U.S. focused on President Obama's trip to Copenhagen to lobby the International Olympic Committee on behalf of the city of Chicago's Olympic bid. Clearly those efforts failed.

However, I was more interested in another angle: how this announcement relates to the Brazilian economy.

The 2014 FIFA World Cup is also being held in Brazil. The FIFA World Cup actually garners more television viewers around the globe than the Summer Olympics does. Unlike the Summer Olympics, which will take place almost entirely within Rio de Janeiro, the World Cup will be staged in twelve host cities across the country.

So two of the biggest atheletic competitions in the world (possible, the two biggest atheletic competitions in the world) will both be held in Brazil within 2 years of each other. This is great news for the Brazilian economy. Construction will create jobs. Brazil will likely see a multitude of tourists and foreign media visit its country and spend. Brazil will be forced to expand and build up its infrastructure. The economic "multiplier effect" of this infracture spending will likely be considerably greater than it would have been in Chicago, Tokyo or Madrid where infrastructure is already considerably built out and already of a relatively high quality.

The government of Brazil is planning on investing $11 billion into the economy as host. Some analysts have commented that Brazilian commodity producers stand to gain from the massive infrastructure construction. [1]

Reuters India is reporting that a Brazilian government-commissioned study is estimating that the Olympics alone will give the Brazilian-economy a $24.5 billion boost. Furthermore, a U.C. Berkeley study has found that countries that host the Olympics generally have a subsequent growth in exports. [2]

The news goes beyond athletics and international spectacles however.

Just yesterday, the Los Angeles Times reported that Brazil "is leading Latin American nations out of recession." It will have flat to slight growth this year and is projected to grow at a rate of 3.5% in 2010. Compared to another large, industrial Latin American country, Mexico, the differences are stark. The IMF is projecting that Mexico will contract an alarming 7% this year before growing 3% next year. [3]

Of course, these projections are based on the premise that Latin America is indeed going to enter a recovery phase next year. Thats not a given, although it seems more likely than the possibility that the United States will enter recovery next year, in my opinion. Regardless, its clear that Brazil seems to be out-competing many other Latin American countries and is emerging as a strong and dynamic economy in the region.

The Wall Street Journal is painting an even rosier picture. Its reporting economic growth of 1% in 2009, with projected growth of 4.5% to 5% for 2010. However, economists also warn about the dangers of inflation and higher interest rates (despite interest rates being at a historic low at the moment). [4]

I don't mean to sound like a rah-rah cheerleader for Brazil (really!). Brazil still faces major obstacles. The image most Americans have of Brazil is of violent slums, as depicted in the movie 'City of God.' Violent crime is a major issue facing the country. Much of the country lives in poverty and, of those, many are down-right destitute. As is the case in most Third World countries, political and civic corruption is endemic. It has a history of political instability. The list of problems that Brazil faces could go on and on.

However, I think theres some substance to all of the positive reports coming out about Brazil. Normally, when Americans think of large, industrial, developing economies we think of China. However, the Chinese economy is deeply intertwined with the troubled American economy and faces significant structural problems of its own. If you look at my post from yesterday on a possible stock market crash, you'll see that some analysts believe that there is a Chinese commodities bubble. Brazil has many of the positive aspects of an economy like the Chinese one but seems to be a bit less exposed to the type of risks that China faces. Thats my (uneducated) opinion at least, so take it as you will. At the very least, its an economy to keep your eye on.

Of course, who can forget Brazil's two most important assets (nay, national treasures): beautiful Brazilian women and beautiful Brazilian beaches. :)


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