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Brazil Puts the B in BRIC
By Economic Forecasts & Opinions
Brazilian stocks rallied, along with the nation's currency, as investment prospects brighten on the news that Rio de Janeiro will host the 2016 Summer Olympics, making the Bovespa the world's best-performing major index last Friday.

The victory was heralded by some as signaling Brazil's arrival as a major economy. Despite worries about Rio's high crime rate and lack of infrastructure, the chance to bring the Olympics to a continent that had never hosted the Games obviously worked in Rio’s favor.
The B in BRIC
Brazil is the B in BRIC, a term first coined by Goldman Sachs in 2001. The main distinction is that “Chindia” has been developing a gigantic appetite for natural resources – energy, metals and agriculture, etc. to fuel their growth. In contrast, Brazil and Russia, are two of the very few resource rich countries capable of supplying these increasingly valuable commodities to the growing Asian economy.
Brazil’s credit rating was raised to investment grade recently by Moody’s Investors Service after the country built record foreign reserves and averted a prolonged recession amid the global financial crisis with a 1.9% GDP growth rate for the first quarter, powered by domestic demand. This growth by domestic consumer demand makes Brazil look very attractive to investors right now.
Growth Prospect
Rising commodity prices this year have led investors to buy emerging market assets where the economies tend to be more commodity-dependent. Both emerging markets and industrial metals group are outperforming U.S. equities so far this year.

The Bovespa index has surged 57% in 2009 (see chart) on speculation that record low interest rates (currently at 8.75%) and rebounding prices for Brazil’s commodity exports will bolster economic growth without fueling inflation. Based on Credit Suisse`s latest forecast, Brazil’s economy will grow 0.2% this year and expand at a 5% rate in 2010.
The World Bank is predicting Brazil's economy would be the fifth largest in the world by 2016. The Olympics, together with the discovery of oil in the pre-salt area and the hosting of the 2014 World Cup soccer championship, will boost Brazil’s global stature and add about 3% to 4% of gross domestic product in the coming years.
According to studies by a Sao Paulo business school for the Ministry of Sports, the two games will help sustain Brazil's economic growth by injecting $51.1 billion into Latin America's largest economy through 2027 and add 120,000 jobs annually through 2016.
Spend to Impress
Among the biggest problems for Rio de Janeiro hosting the Olympics are infrastructure, crime and security. The city is served by a number of expressways though traffic jams, due to the large car fleet, are very common. Streets are regularly closed because of shootouts and gunfights on subways are not uncommon. The city transportation policy has been moving towards trains and subway in order to reduce traffic congestion and increase capacity. Other problems also include power-supply shortages.
Brazil already plans to invest $11 billion to host the 2016 Olympics. In order to win the bid for the 2008 Olympics, China also pledged to spend $14 billion on infrastructure, but the official figures state that the country has actually spent over $40 billion. So, one could safely assume that Brazil would spend probably a lot more than the planned $11 billion in the next decade or so due to its some of the serious problems mentioned here.
Olympics Effects Driving the Commodity Rally
We need to look no further than the C in BRIC for the Olympic effects on growth when China hosted the 2008 summer Olympics. The boom within and outside China in three key areas — Infrastructure, commodities, and investments — pretty much sum up the ‘Olympics Effect’.
The Olympics brought a wave of construction projects in China consuming vast amounts of cement and steel, crude oil and other commodities from 2001 to 2008. The games have provided a venue for investment benefiting infrastructure related sectors such as base materials, engineering and construction contractors. Other sectors attracting investments also include travel related sectors like hotel properties and services.
Brazil, due to its rich domestic resources, could supply most of the Olympics related commodities needs locally. However, the domino effect could leave China and India scrambling to fill their resource needs, thus bidding up prices of commodities in the coming years.
Investing Strategy
Similar to many developing economies, the regulatory environment in Brazil is not sufficiently clear to attract private investment capital and the stock market is very sensitive to inflows of foreign capital. So, if you are interested in adding Brazil as part of a diversified portfolio, the best way to do so is probably via ETFs like Ishares MSCI Brazil (EWZ) or WisdomTree Dreyfus Brazilian Real Fund (BZF) for a currency play.
For individual stocks, with growth in the rebuilding of infrastructure, the demand for base metals such as steel and copper should increase: Thus benefiting companies like Gerdau S.A. (GGB), Latin America's largest steel maker, Vale S.A. (VALE), the second largest mining company in the world and the largest logistics operator in Brazil, and Companhia Siderurgica Nacional (SID), the second largest Brazilian steel manufacturer. In addition, energy companies like Petroleo Brasileiro SA (PBR) could benefit from the infrastructure spending, as well as hotel operators like Hoteis Othon.
Copacabana Carnival
While Chicago, Tokyo and Madrid are still recovering from the after-shock, the Games are set to take place against impressive backdrops, Rio's stunning beaches and famous landmarks. Although data on the exact economic benefit of an Olympic Games has always been somewhat sketchy, one thing for sure is that the 2016 Olympics is good for business in Rio and Brazil. And most importantly, the commodities market is going to hitch a ride with them. So, see you on Copacabana beach in 2016 and let the Carnival begin.
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It is the lack of infrastructure that made them chose Brazil!!!!!! You hit it on the head without even knowing it. Just think of all the cement and steel adn building and PCV piping that will go into all these new HUGE over priced buildings!!! Just like China ove spent on useless (post olympic) buildings....to make the world think there was a building boom.....ther will be another one... This time they get to seel the world the bill of goods...BRAZIL is the enxt super economy!!! Bullshit and Lies....repackaged with a different wrapping. Cemex should be a good buy on this news.
I am a Brazilian expat living in Germany right now. Good to read about Brazil in ZH.
I agree with the main posting that the situation good and all my money is back home and will keep it there. Growth prospects are very good but it´s not heaven either.
Although the prospects of increasing domestic demand are huge given the big population, we are very dependent of commodity prices and international demand. It the markets tank again, we will tank too.
And there´s violence. That´s why I left the country. The situation in Rio is ridiculous. From a practical perspective, yes, they will hold the Olympics there and it will probably be trouble free. But the only reason is that the local Rio Government will cut a deal with the criminals. Of course they wont admit it, but that´s what happens in Rio. Don´t screw up the Olympics and we won´t annoy your for a while.
The cocaine drug lords run that town and if they felt like raising hell they would. They just won´t because they don´t want to disrupt the cocaine market. Actually the safest place to be in Rio nowadays is IN the favela if you are consumer. Nobody bothers you there as the drug dealers don´t want any kind of disruptions in their market.
All the violent crime in Rio that affects middle and upper classes happen OUTSIDE the favela (except for fights between gangs that affect no one but the gangs), because the criminals are not allowed to rob or kidnap ppl in the favela.
Copacabana is just sad. A bunch of tourists chasing AWFUL hookers. If you are into sexual tourism, at least go for the hot girls, not the cheap ones that wonder Copacabana streets and bars charging USD 30 a pop.
As for investment advice, the stock market did go up a lot. This is not the time to buy. Just settle for Brazilian bonds, and you´ll be making 8% p.a. with very little risk. I don´t see a default coming in Brazil anytime soon.
Likewise, real estate is very expensive and might reach a bubble level soon. Places like Brasilia, for example, are in a bubble scenario already.
As an American who has lived in Rio for 5 years, one only need to look at the Pan-American Games which did absolutely nothing for the Brazilian economy but enrich a few private firms and anger locals because of wasteful, over-sized and over-billed construction projects. It reminds me of the idea to build three casinos and two sports stadiums in downtown Detroit to foster “economic growth” – the clients being suburbanites who tear out of that wasteland looking over both shoulders faster than they arrived after their last dollar is squandered or the final inning called. Oh, I forgot. There was one other group who benefitted, although the competition was intense:
With 700,000 visitors flooding into Rio de Janeiro, the Pan American Games are a profit opportunity for prostitutes in Brazil, where their occupation is legal. They can expect a surge in business and double their usual rates, said Flavio Lenz, a spokesman for Da Vida, a group representing Rio's sex workers.
“An event that attracts more people to the city is great for everybody in the services sector, and sex workers will definitely benefit from a larger clientele,” said Gabriela Leite, president of Brazil's Prostitutes Network, which represents 20,000 professionals.
[http://www.bloomberg.com/apps/news?pid=20601086&sid=aepiKrqW8qIY]
The last time Brazil was “upgraded,” the Bovespa shortly thereafter plummeted from 73K to 30K, and these may very well turn out to be permanent losses, as many exited positions at low points on the panic. Luckily, investors have short memories.
The fact of the matter is is that the Brazilian economy is being increasing driven by US-style debt excess, not any increase in purchasing power or sustainable investment. Rates have fallen. Mortgages extended to 360 months. Minimum payments lowered. The Ponzi scheme is set up here too. Products all over the city are offered for multiple installments because consumers have NO MONEY to buy them. I recently saw an advertisement for a stove, refrigerator and microwave combo purchase on a 5-year installment plan. Government statistics are so overinflated as to be laughable, particularly the employment rate.
Furthermore, for more on how wonderful the “Olympics” have been for the residents of two others cities:
China:
By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, an amount larger than all of the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through 2006, when about 7 million square feet a year was leased.
"The scale of development was unprecedented anywhere in the world," said Rodman, a Los Angeles native who now lives in Beijing, running a firm called Global Distressed Solutions. "It defied logic. It just doesn't make sense."
Construction cranes jut into the skyline, but increasingly they are fixed in place, awaiting fresh financing before work resumes.
Boarded fences advertise coming attractions -- "an iconic landmark" or "international wonderland" -- that are in varying states of half-completion. A retail strip in one development advertised as "La Vibrant shopping street" is empty.
In a country where protests are rare, migrant workers stand in front of several construction projects, voicing their grievances.
"Our boss ran away with the money and he is nowhere to be found," said Li Zirong, a migrant worker from Shaanxi province, who was a supervisor on a stunning building with windows shaped like portholes.
…The government spent $43 billion for the Olympics, nearly three times as much as any other host city. But many of the venues proved too big, too expensive and more photogenic than practical for ongoing use.
The National Stadium, known as the Bird's Nest, has only one event scheduled for 2009: a performance of the opera "Turandot" on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China's leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators. The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall after several years, it owners announced last month.
A baseball stadium that opened last spring with an exhibition game between the Dodgers and the San Diego Padres, is being demolished. Its owner says it also will use the land for a shopping mall.
Among the major Olympic venues, only the National Aquatics Center, nicknamed the Water Cube, has had a productive afterlife. It's now used for sound-and-light shows, with dancing fountains in the swimming lanes where Michael Phelps won his gold medals.
All around the Olympic complex, there are cavernous empty buildings, such as the main press center for the Games, that still await office tenants.
A shopping arcade that stretches for a quarter of a mile across the street from the complex is empty, the storefronts papered over with signs reading "famous stores corridor."
"They wanted to building 'the world's biggest this' and 'the world's biggest that,' but these buildings have almost zero long-term economic benefit," economist Huang said.
…Moreover, the makeover of Beijing for the Olympics led to an estimated 1.5 million residents being evicted from their homes, according to the Geneva-based Center on Housing Rights and Evictions.
In this vibrant capital city of 17 million, there is an insatiable demand for housing, yet prices remain far out of reach of most residents. American-style free-standing homes are being advertised for more than $1 million in gated communities with names like Versailles, Provence, Arcadia and Riviera. Within the Fourth Ring Road, a beltway that defines the central part of the city, two- and three-bedroom apartments are offered for $800,000 in compounds named Central Park and Riverside.
"These are like New York prices, but we are Chinese. We don't have that kind of money," said Zhang Huizhan, a 55-year-old businessman who owns a Chinese furniture factory. He has been looking for five years for an apartment for him and his wife within their budget of $150,000.
The average salary in Beijing is under $6,000 a year.
[http://articles.latimes.com/2009/feb/22/world/fg-beijing-bust22]
Vancouver:
But Vancouver had yet one more factor providing wind at it's back. They had "won" the right to co-host the 2010 Winter Olympics with Whistler (a nearby ski resort town). The resulting inflow of foreign investment was going to put the city "on the map" in terms of major cosmopolitan international cities. Tokyo, London, New York, Milan, Vancouver. Yes. It was ordained. The International Olympic Committee had declared it so. The provincial government even began an advertising campaign with the slogan "The Best Place On Earth." Old license plates bearing "Beautiful British Columbia" are now exchangeable for new ones with the olympic logo and the new slogan - for a fee of course. All of this is symbolic of a peak atmosphere of social mood. People were made to feel extremely lucky just to be part of such a place. As such, property values needed to reflect this newfound prestige. And of course, "there is only so much land."
Or so went the story.
Unfortunately, Vancouver residents have been shocked to learn over the last few months that gravity does indeed apply to them also. Sure as the sun rises, boom has turned to bust. And perhaps nowhere in the world has it manifested so spectacularly as in Vancouver. Where social mood was highest; it has furthest to fall.
[http://futronomics.blogspot.com/2009/01/olympic-sized-depression-hitting...]
How in the world are the World Cup and the Olympic Games going to help Brazilians whose wages remain in the $250/month range? It’s pure propaganda. Furthermore, not only does Brazil’s export-dependent fragile economy do absolutely nothing for its citizenry, but allocating more funds for useless “domestic” projects like Chinese Olympic stadiums with one event per year will only squander resources which desperately need to be funneled into sustainable WEALTH CREATING development.
Lastly, there are no shootings on “subways” in Rio. The subway is not only the cleanest place in the city but without question the safest way to commute. Such a basic misunderstanding should cast doubt on your entire submission.
“BRICS” are not immune to the laws of physics.
RAG
Good analysis, it took Montreal 30yrs to recover from the losses of their olympics!
2016 should be ripe for terrorists, as the depression should be in full swing.