The True Socio-Economic Costs of the FIFA World Cup

on Jun 15, 2014

Brazilians Torn Between Passion for Football and Social Equity!

With the 2014 FIFA World Cup well underway in Brazil, a crack appears to be forming between proponents of the massive spending allocation and those who oppose it. The streets of Rio de Janeiro and São Paulo were recently peppered with scores of protesters who oppose the extravagant spending on the World Cup. Estimates peg expenditure at $14 billion, and this has thrown the citizenry into a quandary.

Brazilians are exceptionally passionate about football, but they are equally focused on eradicating inequalities in their country. A great deal of disappointment is evident regarding the widespread government malfeasance, and the absence of requisite investment in the country’s infrastructure, hospitals and public education system. The outcry that erupted on the opening day of the FIFA World Cup made international headlines, and more is sure to follow.

A Pyrrhic Victory for the Brazilian Economy?

Brazil is a country that has been racked by financial turmoil and social unrest in recent times. The Brazilian economy was flourishing during the global financial crisis, but during 2012, the economy lost steam. A growth rate of just 0.9% confirmed the reality that a deceleration in economic fortunes of the country was en route. Soon thereafter, scores of people took to the streets and protested what they considered the poor provision of public services, a corruption pandemic and exorbitant costs of living.

Part of the problem in Brazil is the high degree of government involvement in regulating the private sector, by way of taxation. The Brazilian government spends just 1.5% of its gross domestic product on upgrading infrastructure and developing it. The global average is closer to 4% of GDP on infrastructure. By contrast, the Brazilian GDP is comprised of just 16% in infrastructure components, while other major economies’ infrastructure component exceeds 70% of GDP.

Brazilians are justly concerned about the fact that most of the stadiums built for the purposes of the FIFA World Cup will be empty after the competition. Many economic analysts, including experts from Banc De Binary are of the opinion that the financial benefits from hosting this prestigious tournament will be short-lived. Economists have alluded to the diminished productivity during the course of the World Cup as a major factor that will offset any gains being added to the economy.

Moody’s has estimated that the World Cup stimulus will inject $11.1 billion into the Brazilian economy, which is insignificant given the sheer size of Brazil’s $2.2 trillion economy. The additional revenues that are expected to be earned by Brazil over the next 10 years will add only 0.4% to the GDP of this Latin American nation. What is more likely is that the disruptions caused by this football competition will result in short-lived returns.

The $11 billion that has already been spent on preparing stadiums for the World Cup represents just 0.7% of the planned investment spending for Brazil during the four-year period (2010/2014). The positive publicity generated by hosting the World Cup will be tarnished to a degree by the social unrest that is now taking place across the country. Earlier reports by the Brazilian government cited inflated figures, but many Brazilians remain sceptical.

Increased Spending Results in Higher Costs for Tourists

With a massive influx of tourism now hitting Brazilian shores, the 32 day series of events is likely to see bumper sales of all football World Cup related memorabilia, hotel stays, entertainment expenses and the like. The Brazilian real has appreciated by an estimated 5.8% against the dollar during 2014. This is the strongest comeback among a basket of 31 major currencies. What this means for the Brazilian tourism industry is higher prices for hotel stays and entertainment, but the potential lowering of demand at the top end because things are now more expensive.

As foreigners flock to Brazil, they exchange their dollars, euros and British pounds for Brazilian reals – thereby boosting the value of this currency. Bloomberg economists anticipate that the Brazilian currency will likely be 8% cheaper against the dollar by the year’s end. The tourism Ministry in Brazil anticipates that tourists will spend approximately $2,460 per person during the course of the World Cup. With an estimated 600,000 people coming to Brazil, that translates into $1.5 billion for stores, restaurants and hotels in the country.

The Brazilian real has managed to claw its way out of negative territory in recent years. At one point, the currency had lost 33% of its value against the greenback. European football fans will find their euros having almost 7% less purchasing power against the Brazilian currency, while fans from the United Kingdom will receive an estimated 3% less for their money at this juncture. Inflation in Brazil was recorded at 6.37% during the month of May 2014, resulting in the central bank initiating a $60 billion currency intervention program. Meanwhile, international institutional investors have wagered $25 billion in the futures markets in anticipation of Brazilian real declines. By 5 May these wagers were pegged at $29 billion.

While central bank intervention was deemed a major factor driving the strength of the real, it is likely to take a backseat role between July and December 2014. As anticipated by leading economists, the real is likely to reverse its games as 2014 wears on. These declines will not affect tourists who are presently in Brazil and experiencing higher prices as a result of the temporary strengthening of the Brazilian currency. The Big Mac index is one such measure that makes it easy to understand relative prices around the world. The Big Mac in Brazil is presently priced at $5.60, but it was 7% cheaper back in January.

Further evidence of the likely reversal that is going to take place in the Brazilian economy comes via the World Bank. This economic body reduced its estimate for Brazilian economic growth from 2.4% for 2014 to just 1.5%. Viewed in perspective, this means that the Brazilian economy has averaged an annual growth rate of 1.9% over the past four years – almost 50% less than the Brazilian growth rate in the years prior. Another worrying trend is the increase in the current account deficit from $6.3 billion in March 2014 to $8.3 billion in April 2014. For the vast majority of football fans however, the fluctuating fortunes of Brazil’s economy are of little interest when it comes to the FIFA World Cup.


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