The countdown to 2016 Summer Olympics has begun, and Brazil is warming up to host the event from August 5 to August 21. As everybody knows, such events normally boost the economy of the concerned country. And if it is a country like Brazil, which is caught into recession, a peek into the potential impact of Olympics becomes more necessary.
Investors should note that economic woes are not new to the Brazilian economy, with its gross domestic product shrinking for the fifth successive quarter. Brazil recorded a 5.4% year-over-year decline in GDP in the first quarter of 2016. The economy is guilty of high inflation and unemployment. With this, many are looking forward to how far Summer Olympics 2016 benefit this woe-begotten economy.
Inside the Cost-Benefit Analysis of Olympics 2016
Reportedly, Brazil shelled out about $7.1 billion on the Olympic event and the associated infrastructure including the building of roads, a new rail line and stadiums. The spending - a major part of which is funded by the private sector - was higher than its FIFA World Cup 2014 budget. Now, it is very likely that such huge investments will trickle down to every sphere of the domestic economy, giving a much-needed boost to this recession-stricken country.
A source said, for every $1 USD spent, $3.26 will be earned until 2027. However, since these projections are often overstated, the source indicated that "the economic impacts of Olympic Games are under $10 billion" on average.
Boost to Tourism
Whatever the case be, the tourism sector will benefit the most. Expansion in hotels, demand for airlines, food and drinks, strengthening of several other infrastructure, and heavy use of media should give a big-time boost to the related sectors.
During the FIFA World Cup, the country saw a considerable surge in foreign tourists from the year-ago period. This in turn resulted in almost 60% year-over-year higher spending by tourists during the event.
A Ministry of Tourism study reveals that "a turnover of $64.6 billion and creation of 115,000 jobs across the country" will likely be realized from the event. Also, "out of nine surveyed sectors, seven are estimated to grow in sales this year."
As per that study, car rental companies will be one of the largest beneficiaries with estimated sales growth of 9.6% followed by inbound tourism (8.3%), road transport (6.6%) and lodging facilities (5%).
Despite this promise, we do not expect the positive impact of Olympics 2016 to the Brazilian economy to be as great as expected. The key reason behind this is the outbreak of the Zika virus which is presently weighing heavily on ticket sales.
Despite a still-flagging economy, Brazilian stocks and ETFs are skyrocketing lately, mainly on Dilma Rousseff's temporary resignation. The impeachment trials against former president Dilma Rousseff and the prospect of changes in government have been the real drivers of Brazilian stocks.
Acting President Michel Temer is presently doing a decent job. The finance ministry also expects a recoil in the economy in the next few quarters by "the timely implementation of measures recently announced."
Olympics 2016 frenzy cannot definitely be ruled out. The to-be event is expected to have a considerable impact on smaller-cap companies which are mainly tied to the domestic economy. Investors wishing to play the likely Olympic bounce via the Brazil ETFs route can pick from the three choices given below.
Market Vectors Brazil Small-Cap ETF (NYSEARCA:BRF)
This fund provides exposure to the small-cap segment of the broad Brazilian equity market by tracking the VanEck Vectors Brazil Small-Cap Index.
iShares MSCI Brazil Small-Cap ETF (NYSEARCA:EWZS)
This ETF is also a small-cap centric fund and follows the MSCI Brazil Small Cap Index.
While these are the best bets at present to leverage the Olympics mania, one can take a look at the largest Brazilian ETF - iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) - which has held up pretty well lately.