Is Brazil's economy as strong as its soccer team? (Part 5 of 7)
Brazil’s bearing the cost of hosting an international sports event
In events of a scale as large as the World Cup and Olympics, costs are often underestimated. In addition to the huge expenditure incurred by the likes of Anheuser-Busch InBev (AHBIF) and Coca-Cola (KO), who sponsor the events, the host country faces huge establishment- and provision-related expenditures, leading to increases in public debt. And, for a country like Brazil that’s already beset with poverty and laden with a huge amount of public debt, the spending demanded by the World Cup and the Olympics (which Brazil is scheduled to host in 2016) only implies a risk to economic stability.
At the expense of social development
Brazil is believed to have spent around $11.5 billion already in getting ready for the World Cup. Of this, $3.6 billion has been spent on building two huge stadiums in Brazilian cities with population base too small to retire the public debt which gets accumulated in building such massive structures.
In fact, the World Cup is being hosted at the expense of much-needed social development. Two-thirds of the public expenditures had initially been earmarked for improving local transportation, with only one-third going to facility construction. Now, that split is more like 50-50. A bullet train project from Rio to São Paulo seems stalled, along with major airport renovations.
It’s for these reasons that Brazilians have taken to the streets in protest of the expenditures their country has incurred for the World Cup. The stock markets had, consequently, reacted negatively, with the Bovespa index declining 1.5% between June 12 and June 17. At the same time, ETFs like the iShares MSCI Brazil Capped (EWZ), which measure broad-based equity market performance in Brazil and has holdings in top companies like Itau Unibanco Holding S.A (ITUB) and Ambev SA (ABEV), declined 2.6%
Where is the money flowing?
Officially, the Fédération Internationale de Football Association (or FIFA)—the international governing body of the association for football, futsal, and beach soccer, with a membership of 209 national associations—required only eight host cities from Brazil. But Brazil chose to provide 12 host cities. Though Brazilian officials may have made this decision with an aim to spread the wealth of these games, they missed assessing the additional costs that would be incurred and the lack of funds in the economy.
Moreover, Brazil has spent some $270 million on building a 46,000-seat oversized stadium in the city of Manaus, which is largely inaccessible by road and whose soccer team averages only 4,000 fans per game. The stadium is to be used for only four World Cup games. This is reason enough for the Brazilian public to protest these expenditures.
To find out whether FIFA-driven tourism might be able to help boost the economy, read on to the next part of this series.
Browse this series on Market Realist:
- Part 1 - Why is Brazil an attractive investment destination?
- Part 2 - Why you should be cautious when investing in Brazil
- Part 3 - Why Brazil’s sovereign debt is rated 1 notch above junk
- Sports & Recreation