Back on December 29 of last year, we explained how under the burden of its soaring current account deficit, and its its first primary fiscal deficit since 1998, not to mention numerous corruption scandals and a dysfunctional monetary policy, the Brazilian economy "just imploded." We also noted the main reason for the Latin American collapse: Brazil had for the past decade become China's favorite source of commodities, and now that China suddenly no longer needed commodities, the Brazilian economy went into freefall.
We followed this up a month later with "Brazil's Economy Is On The Verge Of Total Collapse" which repeated more of the same, only this time the situation was even worse.
It took the rating agencies 7 months to figure out what our readers had known since 2014, when two days ago S&P downgraded Brazil's credit rating from Stable to Negative citing, what else, the "sharp deterioration of the growth and fiscal consolidation outlook and heightened political/institutional friction" adding that "the negative outlook reflects the agency’s view of a “greater than one–in–three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected."
In other words, Brazil is about to become the next BRIC to follow Russia into junk territory:
Goldman followed up S&P with a report in which it said "There is nothing so bad it couldn't get worse!" tongue in cheekly because it noted that "records show that over the last 11 years we cannot find a period with a strictly-worse growth-inflation outcome than that of 2Q2015 . That is, since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015 (i.e., there are no data points in the lower right quadrant in Exhibit 1). In fact, in 96% of the 46 quarters between 1Q2004 and 2Q2015 the economy was delivering simultaneously higher growth and lower inflation than during 2Q2015 (upper left quadrant of Exhibit 1). Finally, during the remaining 4% of the quarters, the economy was performing better in one component—recording lower growth (4Q2008 and 1Q2009) but also much lower inflation than currently (located in lower-left quadrant).
Exhibit 1: 2Q2015 - A sour macroeconomic spot: Very High Inflation and declining growth
In short, the Brazilian economy has never been worse and just to hammer that point home, Goldman added a chart which makes it quite clear that Brazil is not in a recession: it is almost certainly in a depression at this moment - note the recession bar on the chart below and where it is now.
One can debate what is causing this until one is blue in the face, and Goldman does, repeating once again that it is the collapsing current and fiscal accounts that are the culprits for Brazil's depression...
The sizeable current account deficit and rapidly widening fiscal deficit are also a significant source of market concern. We repeated the same exercise above, this time with a two-dimensional vector that contains the fiscal and current account balances vs. growth and inflation. The two deficits together are now tracking at over 12% of GDP of GDP, by far the worst combined outcome in more than a decade. Exhibit 3 shows that over the last 11.5 years (since Jan-04) we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-14 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.
... but it doesn't really matter: whether it is China, whether it is runaway stagflation, whether it is simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall.
The result is that the local central bank is about to lose control: despite soaring inflation, overnight the central bank Monetary Policy Committee hiked the Selic policy rate by another +50bp, to 14.25%. This was the sixth consecutive 50bp rate hike following the initial 25bp hike on October 29. What made this hike unique is that the policy statement was modified by adding a sentence that openly indicated that the tightening cycle ended yesterday, and that the policy rate will remain at the current level for a prolonged period of time.
In other words, Brazil's central bank has given up on fighting inflation and is instead hoping to stabilize what little is left of the economy.
Unfortunately, it may be too little too late, and now both the market...
... and the local population as the following Evercore ISI chart of consumer confidence shows...
...have finally figured out what it means when your economy snaps shut as your biggest trading partner suddenly shuts its doors.
Unfortunately, it is getting even worse, as a cursory scan of headlines in just the past 24 hours reveals:
- Brazil downgrade threat is a real danger sign
- As Brazil's Economy Goes In Reverse, Illusion Of Prosperity Fades With It
- New Scandal Emerges in Brazilian Hideaway
- Brazil indicts Italy's Saipem for bribery with Petrobras
- Italy's Saipem Implicated in Petrobras Corruption Scandal
- Brazilian police probe nuclear submarine program
But the Brazilian economy hit its metaphorical, and literal, bottom earlier today when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, "athletes in next year's Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games."
An AP analysis of water quality revealed dangerously high levels of viruses and bacteria from human sewage in Olympic and Paralympic venues — results that alarmed international experts and dismayed competitors training in Rio, some of whom have already fallen ill with fevers, vomiting and diarrhea.
In other words, competitors in Brazil's olympic games will be swimming in shit.
How is this possible? Simple: the government promised it would fix everything, and the IOC believed it. Now, the moment of truth arrives and it is literally covered in feces.
Brazilian officials have assured that the water will be safe for the Olympic athletes and the medical director of the International Olympic Committee said all was on track for providing safe competing venues. But neither the government nor the IOC tests for viruses, relying on bacteria testing only.
Extreme water pollution is common in Brazil, where the majority of sewage is not treated. Raw waste runs through open-air ditches to streams and rivers that feed the Olympic water sites.
As a result, Olympic athletes are almost certain to come into contact with disease-causing viruses that in some tests measured up to 1.7 million times the level of what would be considered hazardous on a Southern California beach.
Despite decades of official pledges to clean up the mess, the stench of raw sewage still greets travelers touching down at Rio's international airport. Prime beaches are deserted because the surf is thick with putrid sludge, and periodic die-offs leave the Olympic lake, Rodrigo de Freitas, littered with rotting fish.
"What you have there is basically raw sewage," said John Griffith, a marine biologist at the Southern California Coastal Water Research Project. Griffith examined the protocols, methodology and results of the AP tests.
"It's all the water from the toilets and the showers and whatever people put down their sinks, all mixed up, and it's going out into the beach waters. Those kinds of things would be shut down immediately if found here," he said, referring to the U.S.
As AP notes, more than 10,000 athletes from 205 nations are expected to compete in next year's Olympics. Nearly 1,400 of them will be sailing in the waters near Marina da Gloria in Guanabara Bay, swimming off Copacabana beach, and canoeing and rowing on the brackish waters of the Rodrigo de Freitas Lake. They will all be delighted to learn about the "quality" of the water they will be swimming in: "Everybody runs the risk of infection in these polluted waters," said Dr. Carlos Terra, a hepatologist and head of a Rio-based association of doctors specializing in the research and treatment of liver diseases.
The AP commissioned four rounds of testing in each of those three Olympic water venues, and also in the surf off Ipanema Beach, which is popular with tourists but where no events will be held. Thirty-seven samples were checked for three types of human adenovirus, as well as rotavirus, enterovirus and fecal coliforms.
The AP viral testing, which will continue in the coming year, found not one water venue safe for swimming or boating, according to global water experts.
The irony is that most countries go broke after the Olympics, when the spending on infrastructure and facilities dries up. Brazil may be the first nation in recent history to have imploded before the Olympics.
In the meantime, just like Greece, Brazil promised to stars and the moon...
In its Olympic bid, Rio officials vowed the games would "regenerate Rio's magnificent waterways" through a $4 billion government expansion of basic sanitation infrastructure. It was the latest in a long line of promises that have already cost Brazilian taxpayers more than $1 billion — with very little to show for it.
Rio's historic sewage problem spiraled over the past decades as the population exploded, with many of the metropolitan area's 12 million residents settling in the vast hillside slums that ring the bay.
... and delivered, well, 1.7 million times the normal amount of crap. And now reality comes crashing back with a bang:
As the clock ticks down, local officials have dialed back their promises. Rio Gov. Luiz Fernando Pezao has acknowledged "there's not going to be time" to finish the cleanup of the bay ahead of the games.
Rio Mayor Eduardo Paes has said it's a "shame" the Olympic promises wouldn't be met, adding the games are proving "a wasted opportunity" as far as the waterways are concerned.
But the Rio Olympic organizing committee's website still states that a key legacy of the games will be "the rehabilitation and protection of the area's environment, particularly its bays and canals" in areas where water sports will take place.
Just don't hold your breath. Or actually, if you want to avoid the smell, hold it.
We end with a note of hope for our Greek readers: yes life is bad, and it won't get better for a long time, but it could always be get worse: you, too, could be swimming in feces.