The economic impact of Brazil’s 2014 World Cup and 2016 Olympics
Now that 2012 London Olympics are over, the focus is on Brazil - one of the fastest growing economies in the world. Like many emerging nations, Brazil has been handicapped by a lack of essential infrastructure - roads, railways, airports and marinas.
Will the infrastructure being built for the 2014 World Cup and 2016 Olympics help alleviate this situation – or just leave the sporting powerhouse with a new set of sparkling arenas?
Doubling-down its growth bet
International sporting events can be seen as a coming-out party for countries who want to show off their new status as economic giants – think the Beijing Olympics of 2008, or even Barcelona in 1992.
Brazil certainly belongs to the club: its rapid growth in past decades (see chart 1) has made the country the world’s sixth-largest economy, although growth slowed in 2011.
But big sporting events don’t necessarily pay off short-term for host countries, as we explained in our previous story on the economic impact of the London Olympics and the Euro 2012 Championship in football.
Brazil is doubling-down its sports bet, holding both the 2014 FIFA World Cup in football and the 2016 Summer Olympics in Rio de Janeiro. As most of the costs are spent on (re-)building sports stadiums and the infrastructure that allows fans to get to and from the stadiums, Brazil will definitely have synergies hosting the two events with only two years apart.
Expectations of costs and benefits
How much will it cost? A study by University of Sao Paulo estimated the infrastructure outlays in Brazil ahead of the 2014 World Cup to be roughly USD 18bn, with USD 14bn coming from Brazilian taxpayers’ pockets. The expected outlays devoted to hosting the Olympics are an additional USD 15bn, resulting in a total outlay of USD 33bn for both sport events. This is large compared to other recent Olympics spending, as chart 2 shows.
But there will, of course, be benefits. Brazil’s Ministry of Sports – not exactly an independent source – claims 120,000 jobs will be created pr. year by the preparations for the two big sports events. Which is not bad!
Extracting a few more figures: according to a survey conducted by University of Sao Paulo, the overall gross economic impact of 2016 Olympics is expected to be USD 51.1bn. Furthermore, according to a study by Ernst & Young, the overall impact of the 2014 World Cup impact is expected to be USD 70bn from both direct and indirect investments. That is a total of more than USD 120bn in gross economic impact from hosting the two events.
That seems EXTREMELY optimistic I must say! I would therefore be careful taking the total cost of USD 32bn and total benefit of USD 120bn as the holy truth. In the past we have seen the benefit being significantly overly estimated, while the cost similarly been way beyond budgets. This is exactly what we are seeing with the 2012 London Olympics.
Infrastructure and growth
Brazil’s president Dilma Roussef recently announced a commitment to spend USD 66bn on longer term infrastructure projects. The plan has a 15-year time frame, so it’s not all about getting ready for the two big sporting events. Nevertheless, such a commitment to infrastructure improvements sends a strong signal that Brazil is ready to splash some cash catering for its future economic growth.
Which industries will benefit the most?
Leading up to, during and in between the two events, tourism is expected to increase drastically, mainly within Rio de Janeiro. Rio is already established as a popular tourist destination, with more than 1.4m visitors each year. Adding the two events, tourism is expected to more than double to 3.3bn visitors every year. These are massive volumes, and will surely benefit the local hotel and retail industry.
We have learned from the London Olympics that the crowding out effect is a risk, where regular visitors to London boycotted the city during the Olympics, creating less than expected demand for hotels and other tourist related activities. That effect might not be as drastic for Rio de Janeiro as it is more of an exotic place to visit for many international travelers, not the ‘every-day stop’ that London has become.
Other industries that will surely benefit are the construction and electricity industries. These industries will mostly benefit in the periods leading up to the events, whereas the tourist-related industries will see most gains during the actual events.
In addition to those mentioned above, the telecommunication sector, along with IT and transportation will surely benefit from job creation and higher demand from international visitors.
For the investors out there, I will follow up tomorrow with several investment prospects within sectors mentioned.
Little short term gain – but longer term potential exists!
Overall, the short term impact is likely to be small and unlikely that World Cup or Olympics will deliver massive growth to the economy.
Nevertheless, it is clear that infrastructure investments in Brazil will be a driving force for economic growth in the longer term. The country will take quite a few steps towards modernization, become more efficient and lure increased foreign investment.
With improved roads, railways and marinas the country will increase its efficiency, making it more attractive to do business with and some of its core export products iron ore, soybeans and coffee might benefit with increased demand from overseas.
Furthermore, hosting a successful World Cup and Olympics will be a catalyst in the country’s image-building going forward. In the end, the reputation gain is likely to be higher than the actual financial gains of the two sport events!