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Brazil's Economic Crisis After the 2016 Rio Olympics

September 13, 2016

Brazil flag

The motto on Brazil’s national flag reads Ordem e Progresso, which comes from the Positivist expression “order as the basis; progress the goal.” However, in recent times, it seems as though order is dramatically slipping away, and the goal of national progress has been impeded by financial instability.

The recent Rio Olympics briefly sparked feelings of national pride as Brazil took center stage in the global arena, but those feelings are quickly fading as the country returns to a full plate of long-term financial and economic challenges. Some of these challenges are decades in the making and have now broken to the surface, causing all kinds of ripple effects for the nation’s economy.

Challenges and Issues Brazil is Facing

As the dust from the 2016 Rio Olympic Games settles, Latin America’s largest country must now address a multitude of economic and political stresses, which include:

  • Hefty price tag of the Olympic games: While the Olympic games provided some local employment opportunities and spikes in local revenue, the games left an overall price tag of more than $12 billion, of which Rio would be responsible for about one-fourth.
  • High jobless rate: Brazil’s jobless rate rose to 11.6 percent through July. More than 1.7 million Brazilians lost their jobs in the past year, which puts the total unemployed population at around 11.8 million.
  • Operation “Car Wash” and Investigation: The massive corruption probe at Petrobas uncovered a scheme involving fraudulent procurement contracts, resulting in a multibillion-dollar asset write down. The fallout from the scheme has caused a proliferation of securities litigation lawsuits from investors. These include several opt-out actions being brought by Kessler Topaz on behalf of several U.S. and European investors against Petrobas. The bribery and kickback scheme, which lasted about a decade, has been called the single largest corruption scandal in Brazil’s history.
  • Impeachment of President Dilma Rousseff: Brazil’s Senate voted to impeach President Dilma Rousseff on charges of violating budgetary laws in order to hide the true budget deficit (i.e., “fiscal sidestepping”). Rousseff’s former vice president, Michel Temer, has been sworn in to serve the remainder of her term. The majority of Congress felt that she had lost the “aptitude to govern.”

All of these factors are combining to create a true crisis for one of the world’s key players — Brazil has the ninth-largest economy by nominal GDP, and is the second-largest economy in the Western Hemisphere. Two of the main challenges it faces are to attract investment and to continue to spur economic growth.

Proposed Measures to Help the Economic Slump

Some of Temer’s plans to help Brazil regain some stability include:

  • Instituting spending caps to shrink budget deficits, which currently run at about 10 percent of GDP
  • Fostering a more business-friendly atmosphere by slackening labor market regulations and streamlining environmental permit authorizations
  • Placing caps on civil servant salaries and pensions. This suggestion is facing much opposition, although economists agree that the country will likely go broke if it doesn’t place checks on salaries, pensions, and social security.

Lastly, in contradiction to earlier statements by Temer, Henrique Meirelles, Brazil’s finance minister, has not ruled out the possibility of temporary increases in taxes. However, he acknowledges that this would be a last-resort measure, and is in favor of initial government cost-cutting as well as a thorough evaluation of all federal programs.

On the one hand, there will always be a breed of investors who thrive off of crisis conditions. However, as with any crisis situation (like the Brexit vote), the majority of investors will likely be hesitant to engage until the dust settles and some evidence of stability surfaces. One thing is for sure in all of this: the situation in Brazil is dire. Car Wash may have just been the beginning; there could still be much institutionalized corruption linking large Brazilian companies and political parties. For now, identifying and eliminating fraud and corruption will be the biggest challenge. This has been a long-time source of loss for past investors, and is the main deterrent for future investors.

The economic conditions and instances of fraud in Brazil can have serious effects on investments and securities. If you have any questions or concerns regarding the implications of such crises, contact us today at Kessler Topaz. We are dedicated to representing the rights of investors and shareholders and eradicating fraud and corruption across various platforms.