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The Beautiful Game: Brazil and the Economics of Football

With less than a year left before the World Cup kicks off in Brazil, the economics of the event are starting1 to come into focus. The country is hoping for a major boost, and some sectors – construction and transportation among them – will almost certainly see a significant uptick in profits. But just how much will those gains be worth? And are there still opportunities for firms that might want to get involved?

“If we had this conversation three years ago, I could show you lots of opportunities in terms of infrastructure and services,” says Claeiber Abreu, J.P. Morgan’s Vice President of Traditional Trade Finance in Brazil. “Most of this has been done… but we still have a lot to do in Brazil.”2

Indeed, more money will be needed to finance some of the major infrastructure projects that still need to be completed. The Brazilian government has been doing its part to help spur foreign investment, announcing two critical new policy measures in the last several months.

Earlier this year, the Central Bank relaxed its reserve requirements in certain cases. Under the new rules that took effect on January 30, large banks that offer credit for investment in capital goods are allowed to deduct up to 20% of the reserve requirements for their “on-call” deposits. This measure alone was expected to generate an extra $7.3 billion in additional credit, according to the Central Bank.3

And in June, the government unexpectedly lifted a financial operations (IOF) tax on foreign bond buyers. The tax, which had been set at 6% since 2009, had been intended to slow the arrival of “hot money” into the country. As of 2013, that is no longer a major concern, Brazil’s finance minister, Guido Mantega, said when making the announcement.4

The high levels of liquidity in the international market “would have adversely affected our activities and we were forced to put several obstacles in place,” Mantega said. “Today, with the market normalized and the move from the FED [Federal Reserve] to reduce its expansionist policy, we are able to remove these obstacles.”5

While such policy changes could certainly help stimulate foreign investment for the World Cup and the Olympic Games, which Brazil is hosting in 2016, it’s difficult to link such measures directly to either of those events, says Fabio Akira, J.P. Morgan’s Chief Brazil Economist. That’s because stimulating foreign investment is a key part of the government’s overall strategy for economic growth. And they have good reason to target FDI: inflows have fallen off sharply since mid-2011.

Indeed, in many ways Brazil is facing a challenging macroeconomic situation. Rising inflation, widespread unemployment, social unrest, and weak demand from China have been putting the brakes on Brazil’s economic growth, which slowed to just 0.9% in 2012. In June, J.P. Morgan revised down its projections for the country’s GDP growth for both this year and next with growth now predicted to register at 2.3% for the next two years, down from the previous forecasts of 2.5% for 2013 and 3.5% for 2014.6

Attracting foreign investment is a tall order given such macroeconomic circumstances, Akira says. At the same time, the monetary policies of developing countries have reduced global liquidity, creating a less supportive environment for investments in emerging economies, Brazil included.

But the news isn’t all bad, says Akira.

“Even at the lower growth rate, we still see next year’s GDP growth better than this year’s,” Akira says. “An important part of this growth acceleration will be driven by the infrastructure investments, including [those associated with] the World Cup.”

The government has said that it will need an impressive $13 billion to get ready for the World Cup, a full $9.5 billion more than South Africa spent for the event in 2010.7,8. To date, most of the money spent has gone toward the construction and upgrading of 12 stadiums across the country. Meanwhile, spending on other infrastructure projects such as roads, airports, and public transportation networks seems to have fallen behind.

“I believe there is a risk that the airports, hotels and roads will not be totally ready to receive this huge number of people during the World Cup next year,” says Abreu, adding that the government “provided all of the money they needed for the stadiums, but for transport, airports, etc., it’s a little late.”

At this point, however, most of the transportation projects have already been auctioned off, even though they may still be far from completion. But there are still some significant opportunities for companies looking to participate in the World Cup action.

Tourism is one sector that can expect to reap major gains, although these will largely accrue to local businesses, not international ones. The Brazilian government hopes to attract some 600,000 international visitors to the 32-day event, which would be double the number that turned up in South Africa in 2010. A similar number of foreign tourists could be expected for the Olympics in 2016.

Ernst & Young Terco, the Brazilian branch of the London-based consulting firm, has predicted that World Cup-related tourist inflow will generate up to $2.7 billion in additional income for Brazilian companies operating in tourism and related sectors.9

For foreign firms, the transport sector continues to hold significant potential, which could last for years to come. With the World Cup stadiums nearing completion, the government is expected to turn its attention to upgrading the country’s airports, rail networks, bus systems, and mass transit lines – many of which are sorely in need of repair.10

“In Brazil, we have this gap in transport all over the country,” says Abreu. “The World Cup and the Olympic Games have just started what we need to invest across the next decades to improve the transport that we have here… I think [the two events] can create a culture in the country to invest more heavily in transportation.”

On the trade finance side of the equation, Abreu notes that while he hasn’t seen a huge number of new opportunities emerging from the activity leading up to the World Cup or the Olympic Games, there are exceptions. “Companies are looking for the support to buy the equipment they need to invest in the country,” he says, adding: “Here in Brazil, trade financing is an important piece of the puzzle.”

From a Brazilian perspective, the real focus should be on the longer-term impact of the World Cup and the Olympics, says Akira, the J.P. Morgan economist.

“Besides the new businesses generated by the event itself, it will be important to deliver a successful event,” says Akira. “That will improve our outlook, that will improve Brazil’s image and will attract new businesses after the World Cup and the Olympic Games.”


1Claeiber Abreu, J.P. Morgan, Personal Interview, August 2013
2 Reuters, December 27, 2012. “UPDATE 2-Brazil central bank eases reserve rules to boost investment”. http://www.reuters.com/article/2012/12/27/brazil-cenbank-reserves-idUSL1E8NR6JW20121227
3Press release, Office of the Minister of Finance, June 2013. http://www.brasil.gov.br/para/press/press-releases/june-2013/finance-minister-guido-mantega-announces-reduced-iof-for-foreign-capital/print
5Fabio Akira, J.P. Morgan, Personal Interview, August 2013
6Brazil 2013-2014 Outlook, J.P. Morgan, June 21, 2013.
7Ernst & Young Terco, “Sustainable Brazil: Social and Economic Impacts of the 2014 World Cup,” http://www.ey.com/Publication/vwLUAssets/Sustainable_Brazil_-_World_Cup/$FILE/copa_2014.pdf.
8FIFA Financial report 2010, http://www.fifa.com/mm/document/affederation/administration/01/39/20/45/web_fifa_fr2010_eng[1].pdf

9Ernst & Young Terco, “Sustainable Brazil: Social and Economic Impacts of the 2014 World Cup,” http://www.ey.com/Publication/vwLUAssets/Sustainable_Brazil_-_World_Cup/$FILE/copa_2014.pdf.
10Council on Hemispheric Affairs, http://www.coha.org/brazils-chaotic-transportation-systems-at-stake-the-role-of-the-private-sector/


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