World Cup Puts Spotlight on Domestic Challenges for Brazil’s Rousseff
In the coming months, Brazil will host the World Cup and hold elections across all levels of government—all while its once-strong economy shows growing signs of a slowdown, hobbled by the country’s suffocating public sector, trade protection and inflation. Brazil’s GDP shrank in the third quarter of last year, its first contraction since 2009. The current outlook is a far cry from the exhilarating days of 2006-2007 when then-President Luiz Inacio Lula da Silva, in office 2003-2011, oversaw a massive oil discovery in the Tupi field off Brazil’s southeastern coast and successfully wooed FIFA, international soccer’s governing federation, for World Cup hosting rights.
Those accomplishments heralded the arrival of a new Brazil, and the brighter international spotlight that resulted will put Dilma Rousseff, Brazil’s president since January 2011 and Silva’s hand-picked successor, to the test this year.
Although soccer-obsessed Brazilians applauded when the country was named the host of the 2014 World Cup, the reality of the task soon hit home. For one, the countrywide mega-event, expected to attract more than 600,000 foreign spectators, has required a massive infrastructural upgrade. Initially, the Brazilian government was slow to respond, first granting private concessions over its major airports—historically run by the air force—and only later fully privatizing them after works failed to meet expectations.
Other infrastructural needs abound: stadiums built or renovated to FIFA’s strict standards, hotel rooms to accommodate visitors and better roads between cities. FIFA’s leadership has been vocally critical of Brazil’s preparations. The federation’s president, Sepp Blatter, this month publicly lamented that never before had a World Cup host country been this far behind so close to kickoff.
Even if the long list of works is completed, the Rousseff administration’s goal will be to get through the World Cup without a major hitch. Any serious incident would be a black eye to Brazil’s international image.
One such complication will be the possibility of violence. In Rio de Janeiro, for instance, while crime has dropped considerably in recent years, there has been a recent uptick of violence around the city. The other major risk is a return of last year’s wave of social protests, when citizen demonstrations against a bus fare increase morphed into countrywide protests over poor public services and police brutality in responding to the demonstrations. At the heart of citizen anger are the lavish stadiums and projects for the sporting mega-events that are being financed with billions of taxpayer reals at the expense of investment in health and education.
The protests have continued at a slow boil in many of Brazil’s cities and will likely re-erupt during this year’s 31-day-long tournament. Any repetition of excessive police action would embarrass Brazil under the global spotlight.
Cracks have meanwhile begun to appear in Brazil’s economic success. Brazil recovered quickly from the Great Recession, averaging 2.7 percent GDP growth from 2009 to 2012, due in part to voracious commodity consumption during China’s boom, aggressive public spending, and a largely protected economy that isolated Brazil from the developed economies that were hit hardest by the downturn.
But China’s GDP growth has slowed from an average of 9.2 percent from 2009 to 2012 to 7.7 percent in 2013, with 7.4 percent growth anticipated this year. Consequently, Brazil’s economy has cooled, too: Growth last year was estimated at 2.3 percent, and Brazilian economists recently cut their forecast growth rate for 2014 to less than 2 percent. Meanwhile, with its trade policies tied to the dysfunctional Southern Cone customs union Mercosur, Brazil’s sheltered economy has not been positioned to take advantage of the renewed growth in developed economies.
Whereas many investors were willing to overlook Brazil’s bureaucratic regulatory framework and labyrinthine tax regime when its economy was booming, those facets of Brazil’s economy are now a drag on investment.
Take the oil industry. Last October’s auction of the Libra oil field, containing an estimated 8 billion to 12 billion recoverable barrels of oil and located in the same basin as the Tupi field, proved disappointing after receiving one bid. While there were concerns over the unproven extraction technology to tap the “pre-salt” layer, and competition from new sources of energy from U.S. shale and Canadian tar, the conditions placed on investment also played a role. The Brazilian government required Petrobras, its semi-public energy firm, to have a minimum 30 percent stake in the deal and mandated a certain percentage of local content to be used in the production process.
The other shadow looming over Brazil’s economy has been inflation, which in the past four years has been slowly edging up, averaging close to 6 percent in 2013 and missing Brasilia’s targets for 40 consecutive months. While the Central Bank has resisted political pressure and kept interest rates relatively high, government spending has shown no sign of slowing, with the budget deficit hitting 3.4 percent of GDP in October 2013, the highest margin since 2009. Credit ratings agencies have lowered their outlooks on Brazilian sovereign debt.
With a presidential election in October, the Rousseff administration is unlikely to pull back on public spending or tackle the economy’s deep structural problems in the near term. Although Rousseff would win elections if they were held today, she faces formidable challengers in Pernambuco Gov. Eduardo Campos and Minas Gerais Sen. Aecio Neves. The election year has increased the pressure on her government to maintain public spending, further fanning inflation.
For the same reason, Brazil’s big structural issues—productivity, bloated public pensions and a high tax burden—will likely be tabled until next year. More than any public-relations bump or economic slowdown this year, the question is whether Brazil will be prepared in 2015 to address the constraints that have come to hobble the economy.
Many of the fundamentals that led to Brazil’s boom remain: a large workforce, a dynamic and diverse economy, and a stable democratic system. But despite all that Brazil has invested in this year, literally and figuratively, 2014 may well fall short of the global coming-out carnival that Silva had envisioned.
Christopher Sabatini is editor-in-chief of Americas Quarterly and senior director of policy at the Americas Society/Council of the Americas. Follow him on Twitter on @ChrisSabatini.
Ryan Berger is a student at the School of International and Public Affairs at Columbia University and was previously a policy associate at the Americas Society/Council of the Americas.
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