Olympics and World Cup effects on Brazil’s economy and FX

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Clik here to view.This is an impossible question to really ever answer definitively but I’ve been wanting to try for a while now. And it seems that Goldman Sachs has beaten me to the punch, at least partly—they’ve published a report detailing the relationship between hosting the Olympics and variety of economic performance indicators. After reading the report I appreciate how unrealistic it would have been to attempt something like this on my own and there’s a lot in there that makes for a good rainy day read. What I was most drawn to was the blurb on correlation between the Olympics and the local FX market as expressed through the host country’s real effective exchange rate.

I’ve never bought the idea that direct investment and spending is the only thing to consider here as simple observation tells us there’s more to it than that. Barcelona and Beijing got major tourism boosts as a result of hosting the Olympics, though whether the event itself broke even is arguable; and I’m not sure how much of the rest of the world knew where Atlanta was prior to 1996. World Cup I suppose isn’t quite as massive an event, but every firsthand account I’ve heard about the most recent world cup in South Africa has been overwhelmingly positive, for whatever that’s worth.

That said, using the real effective exchange rate (REER) concept to measure this certainly has its pitfalls, the main one being its reliance on purchasing power parity to construct the trade-weighted indices that REER draws all of its legitimacy from.

In short, this is where economists’ need to simplify makes things a bit hairy.

But no matter—it’s better than nothing and the meta-view this sort of thought exercise requires actually needs a bit of generalizing to filter out the noise. If you’re not instinctively agreeing with that statement, just consider that while Olympic host country currencies overall appreciate in the years leading up to the opening ceremony, some of the currencies have prepared for the Olympics by depreciating in value; and yet another subgroup of host currencies experienced appreciating values due to high inflation rather than nominal appreciation.

Where does this leave us? By Goldman’s calculation, a US$100 investment begun in 1980 upon the completion of the boycott-riddled Soviet games that then traded into each successive currency upon each subsequent closing ceremony—i.e., converted to Korean won in 1984, Spanish pesetas in 1988, USD in 1992, AUD in 1996 etc—would now in sterling would be worth the equivalent of US$1,020, compared against a US$700 return on rolling 1-year US$100 investments over the same time period.

Does this make the Brazilian real a buy and hold come September?

At this point it’s probably worth briefly outlining a few of the other major influencing factors at play, all of which are so widely reported on now that they hardly need sourcing:

• USDBRL has of late breached the 2.0 mark for the first time in three years and both the president and the central bank have been quite vocal about keeping it in the 2.0-2.2 range.
• Brazil’s economic growth is known to be slowing down this year owing to a number of factors, though where real GDP is headed for successive years is a bit more of a crapshoot.
• Credit card interest rates have skyrocketed and the country’s banking system is entering a corrective phase that Brazil watchers have known to be a long time coming.
• Brazil does not possess the requisite level of income per capita to realize the economic stimulus that might otherwise accrue from such a rapid reduction of policy interest rates.
• Bureaucratic obstacles to doing business in Brazil are legendary and unlikely to change overnight or in the next couple of years.

The bottom line: no trend lasts forever. While Brazil faces the less common circumstances of hosting the World Cup and the Olympics back to back (previously only done by Mexico ’68-’70 and the U.S. ’94-’96), it’s hard to see how any of this is going to translate into a big enough force to move the real.

Original report downloadable here.