While the Olympic Games will generate minor short-term growth and employment in Brazil, the net impact of the 2016 Olympic Games in Rio de Janeiro will be negative for the host country, predicts Euler Hermes.
The trade credit insurer says hosting the Olympics will increase the country’s public debt, cause an increase in business bankruptcies, and add to the country’s inflation rate, which in June was more than 8%.
The Olympics has produced increased investment projects (infrastructure investment of $12 billion) and tourism ($400 million), which will partially offset a 3.5% 2016 GDP contraction in Brazil by .05 of a percentage point.
However, “while these increases in jobs and tourism look good on the surface, they are just not enough to offset the severe economic turmoil that has plagued Brazil since before the Olympics. Some issues, like inflation, could even be significantly exacerbated by the Games,” said Daniela Ordonez, Latin American economist for Euler Hermes.
Direct impact of the sporting mega-events on Brazil’s inflation (percentage points)
According to Ordonez, infrastructure investment and public spending for the Olympics have increased increased Brazil’s public debt by 0.04 of a percentage point of GDP, with the state of Rio de Janeiro’s debt spiking by 17%.
Rio de Janeiro will also be hit by a spike in local business insolvencies after the Olympics, especially among micro and small enterprises, said Euler Hermes.
“The massing of new businesses in relatively few sectors will generate a ‘crowding out effect’ between newcomers and fragile existing companies unfit to benefit from the Olympic games,” said the report. “In addition, many of the new businesses will have a short life and are expected to close after the Olympics.”
The report predicts that hosting the Olympics will inflate Rio de Janeiro’s insolvencies in 2016 by 5% and those of micro and small enterprises by 12%.
Sky-high inflation, of course, is of large concern to Brazilian businesses and households. According to Euler Hermes, since the 2009 announcement that the country would host both the 2014 World Cup and 2016 Olympic Games, “anticipation appears to have accelerated inflationary pressures.”
The two events will boost the country’s overall inflation rate by about 1 percentage point in 2016, of which 0.4 of a percentage point is residual from the World Cup, 0.4 of a percentage point is due to the Olympics, and 0.2 of a percentage point “is a result of hosting both global events in such a short time period.”
“The timing of hosting the World Cup and Olympics back-to-back has had an increasingly negative impact. With everything else the country is currently experiencing, Brazil’s economy did not need more drama right now,” said Ordonez.
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