December 30, 2013 4:28 pm

Brazil: football and reality

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The country showed bulging muscles but little real fitness

Sepp Blatter, the head of Fifa, has taken to invoking “God, Allah, whoever” in his exasperation over Brazil’s lack of readiness for the football World Cup next year. When South Africa hosted the tournament in 2010, Pretoria saw it as a fresh beginning for a country and a continent. Brasília, by contrast, sees hosting the tournament as overdue confirmation that the “country of the future” has arrived. If so, it will be arriving tired and out of puff.

It is 11 years since the ruling Workers’ party (PT) came to power. The PT’s main economic goal was to develop Brazil’s huge internal market. Easy consumer credit and rising real wages soon did that. Meanwhile, high commodity prices buoyed Brazil’s external accounts, a traditional weak spot. The results were extraordinary – and seemingly confirmed when Brazil won the rights to host the World Cup and then the 2016 Olympics.

But there was a flaw in the model. Instead of using the commodity windfall to foster investment, Brazil inflated a consumer bubble. Improvements in public goods such as transport, education and health did not keep pace. At the same time, the bureaucracy kept Brazil near the bottom of the World Bank’s “ease of doing business” league tables. Economically, the country appeared an athlete on steroids – bulging muscles but little real fitness.

Rising real wages have pummelled profit margins, leaving Brazilian companies with the region’s lowest returns on equity, at about 6 per cent. So investment is depressed. Worse still for indebted consumers, the central bank is raising interest rates to quell inflation. Even its external accounts look vulnerable again. The government is addressing some of these problems, although nobody expects serious progress before the presidential election in October.

Pessimists will probably be proved wrong and the World Cup will be fabulous. The national team, the favourite at 3 to 1, may even win. But football is only a mirror of reality – not reality itself. Investors will play Brazil cautiously in 2014.

Email the Lex team in confidence at lex@ft.com

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