Brazil’s Wayward World Cup Ambitions
Brazilian stocks were barely positive on the latest quarter 0.2 percent GDP growth result on 6 percent inflation keeping the central bank on hold, as protests and strikes interrupted last-minute World Cup preparations with popular opinion decrying its cost in survey also showing President Rousseff’s approval at 35 percent with elections just months away. The end of the soccer competition will also coincide with a BRICS summit where the $100 billion joint development bank with equal shares is to be launched with lending to commence in 2016 after a rotating member nation chief executive is chosen. Infrastructure projects will be the focus and Brazil has declined to host it with other capitals vying for headquarters prestige. Unemployment is just 5 percent but retail sales have slumped with consumer debt and state lending arm BNDES has cut subsidized business credit on less demand and contingent fiscal policy cost eroding the traditional primary surplus. Energy and minimum wage interventions have added bloat and been criticized by industry leaders increasingly attracted to the pro-market platforms of rival presidential candidates, especially the PSDB’s Neves who is advised by well-respected former economic officials. To retain support the government has indicated Finance Minister Mantega may be replaced, as he has begun to soft-pedal the swap program with currency retracement to 2.2/dollar. The current account deficit continues to be covered by FDI and both short and long-term portfolio inflows, although in the interregnum Brazilian assets abroad have also surged as exporters keep money offshore. The ruling Workers Party has resorted to hostile campaign rhetoric against the “neoliberal” model and in media ads warns that anti-poverty and middle-class programs could be gutted under opponents’ return to the “dark past.” On the agricultural front both coffee and sugar are struggling as the former copes with crop blight and the latter with price controls and facility collapse. Big domestic and foreign groups provide one-fifth of sugar supply and had relied on disappearing ethanol demand and storage upgrades. They resent the near $10 billion poured instead into World Cup stadiums which may not be recovered under recent estimates of direct economic benefit as visitors forego reported price-gouging and unrest.
Operators point to parallels with Argentina’s treatment of farmers, who are enjoying a record soy harvest but face stiff taxes and regulations, as the government urges immediate sales to replenish foreign reserves that have stabilized close to $30 billion after a combination of peso devaluation and interest rate hikes earlier this year. The black market exchange recently spurted to 12/dollar as the central bank took back 2 percent of the 30 percent benchmark, before a restructuring deal on $10 billion in decade-old Paris Club restored calm. Two initial repayments will be made before the end of President Fernandez’s tenure, and her cabinet hailed the “normalization” step toward bilateral export credit agencies that otherwise must contend with bizarre restrictions and statistics.
