While many soccer fans were ecstatic at Brazil’s hosting of this year’s World Cup festivities—the most expensive ever, at an estimated $11.5 billion—many others were not so sanguine about the cost of the show.
Despite all those new or rebuilt stadiums, airports and hundreds of miles of new fiber-optic cables, among other improvements in the cities where the games were played, there were lots of other visible signs of less favorable activity: tent cities, demonstrations and strikes. The stadiums alone overshot their original 2007 budget estimate to hit $3.6 billion, which is almost four times what they were originally projected to cost.
Infrastructure projects that were much anticipated (and much needed) by the Brazilian population saw delays, cost overruns and waste, according to critics who pointed out that money was diverted from schools and healthcare facilities as World Cup venue projects were prioritized. Then some of those projects either faced delay or abandonment as design concerns or poor planning made them impractical or impossible, with public transportation such as rail and bus projects moving lower on the priority list than airports and stadiums.
Many people who were displaced from their homes so that venues could be built are still living in the aforementioned tent cities, new promised housing having not yet become reality. And workers in São Paolo threatened to derail the opening match by going on strike over pay and layoffs.
Still, mismanaged World Cup projects or not, Brazil’s economy is very tempting to investors, and with good cause. Although the economy has slowed, the country’s large population and expanding middle class have represented opportunity, while its high interest rates have lured capital inflows. Unemployment has been low, although consumers have slowed retail spending and business owners have lost the edge of optimism.
Other countries aren’t so gloomy. In fact, Japan’s banks just provided the country with $700 million in loans, some to increase Brazil’s corn and soy exports to Japan and some to provide financing for oil platform construction. The two are also considering collaborating on a high-speed rail system to run between Rio de Janeiro and São Paolo, and other joint ventures are in the works—between Brazil’s state development bank BNDES and JBIC, Japan’s bank for international cooperation, to help small and medium Japanese companies investing opportunities in Brazil, and between Brazil’s iron ore mining company Vale SA and Japan Oil, Gas and Metals (JOGMEC) to cooperate on coal mining in Mozambique and financing other projects ranging from iron ore to coal and beyond.
Japan, incidentally, is Brazil’s sixth largest trading partner, with Brazil being its second largest supplier of soybeans and corn. Trade between the two countries totaled $15.7 billion in 2012.
Another “odd couple” pairing is Norway’s fertilizer firm Yara, which has announced that it will be buying 60% of Brazilian phosphate miner Galvani Indústria for $390 million as it seeks to expand its key market. It’s paying $225 million for the privilege, and has also made a commitment to spend another $550 million over the next five years to develop Galvani’s mines. Last year Yara spent $750 million to acquire the Brazil fertilizer business of Bunge Ltd., the second largest oilseed processor in the world. Brazil is the fourth largest consumer of fertilizer with a growing rate of consumption.
But Brazil’s currency has appreciated with all that outside investment, making it harder for Brazilian manufacturers to compete and causing the government to boost taxes on some outside funds. In addition, the World Bank has ranked Brazil at 116 out of 189 countries for the ease of doing business there. While in 2014 it is marginally easier to conduct business—its score moved up from 118 in 2013—taxes drag it down. The hours businesses spend annually dealing with taxes are 2,600, compared with 369 for the rest of Latin America. In countries of the Organization for Economic Cooperation and Development (OECD), it only takes 175 hours.
Taxes could prove to be a headache in other ways, too. Should President Dilma Rousseff lose her bid for reelection in October to pro-business candidate Aecio Neves, the business community might be in for a surprise. Neves has announced that he would consider a wealth tax as part of an overhaul to Brazil’s tax code. The idea, while undoubtedly unpopular among the high-net-worth, could win Neves votes from the rest of the population; despite its growing middle class, Brazil has one of the largest gaps between rich and poor in the world.