Impact of Olympics on Brazilian Stock Markets

 

31st Olympiad Games in Rio are in progress these days, in the capital of Republic of Brazil. Historically, the event costs of these International Summer Games Events have outweigh the benefits. It’s fair to begin with a statement, that, “Olympics games have a potential impact on national stock market, however exact magnitude or impact cannot be predicted or determined with perfect certainty”

 

Olympiad games are viewed as ‘pump priming’ tool for a country’s economy. This refers to huge infrastructure development programme drives being implemented to improve facilities in host nation. The “pump priming theory” is put to use to underline the importance of government intervention aimed at increasing aggregate demand.  A recent observation in empirical analysis, reasoned a typical improvement of 23.6% in average stock market gains, accompanied by an increase in GDP, in the Olympics games during the year with exception of Australia and Spain.

 

Brazil needs to consolidate from improvement in Rio’s infrastructure and reach improvement in tourism revenues, to shed-off fears of immediate recession. The short term gains are expected to be in Food, Drinks, Hotel and Airlines Sectors. An initial estimate on total cost of organising Rio Olympics is $ 4.6 billion, whereas total expenses incurred on games as per Reuter’s agency have reached $ 12 billion.

 

As per a rough estimate, the list of biggest gainers among different economy sectors, that stand to gain from this infrastructure development drive, includes construction sector, which will increase by 10.5% , followed by real estate (6.3% ), services (5.7%), oil and gas (5.1%),and transportation and communications (4.8%).

 

Another estimate, provides for an approximation of 1.3 billion brazilian real (which is around $400 million), as expected revenue generation from Tourism sector in Rio Olympics 2016. The estimation also provides for an increase in real growth by just 0.02 percentage points. The real growth achieved, is half than original estimate, which is indicator to lesser stock market gains.

 

The main factors, pros-and-cons, governing the impact of Olympics games, on Brazilian economy are:

 

Pros

  1. A recent analysis provides an estimate that in previous eight Summer Olympics, the stock index of the host country, increased in value, in six out of eight times for the two-week game duration. The trend was reversed in year 2000, Sydney Olympics games and in 2008, Beijing Olympics games
  2. Brazil’s benchmark Bovespa stock index, has improved to 33 percent of its value, in 2016.
  3. Brazil is ninth largest economy in the world with nominal GDP worth about $1.5 trillion, that is more than 2 percent of the globe’s total GDP.
  4. The corrective recovery in commodity prices, has been seen as a positive action in Brazilian stock exchange ahead of the Rio Olympics.
  5. Brazilian benchmark indices have also shown significant improvement in 2016 before start of Rio Olympiad games, 2016. The Brazilian currency Real gained 20% against the dollar in past six months, whereas Brazilian Benchmark Index Bovespa gained 45%.
  6. As per Ministry of Sport’s study, the input of $14.4 billion for the Olympic preparations will generate a 4.26 production multiplier, which will inject approximately $51.1 billion into the Brazilian economy till 2027.

 

Cons

  1. Brazil is amidst toughest recession since the 1930s. Brazil’s rate of investment, as a percentage of gross domestic product is lower than other Latin American countries as well as other BRIC nations such as India and Russia. The lesser capital inflow in Brazilian Industries is likely to reduce monetary gains in Brazilian capital markets.
  2. The regional economy of Rio de Janeiro is heavily propelled by crude oil trade and fall in oil prices has reduced monetary flows in state and Brazilian national economy.
  3. Brazilian region is epicenter of Zika Virus proliferation, which is prime reason for the lower inflow of athletes, and International travellers to the region.
  4. As per IMF analysis, Brazil’s economy shrank by 3.8 percent in 2015 and is expected to shrink further by 3 percent this year.

 

The span of political instability is likely to have a negative impact, on consolidation of gains in Brazilian stock markets. This suspicion is further based upon an apprehension of about 0.4% inflation increase resulting from Rio Olympics, games.

Further, credit default and loan default, is likely to rise further, with an expected 5% increase in Rio de Janeiro-based companies, filing for bankruptcy protection and an expected 12% increase in small business loan defaults.

The coupled effect, of these two forecasted events, is more likely to reduce any temporary gains, in Brazilian stock markets, emerging from, Rio Brazil Olympics, 2016, games.

Based upon the above findings, facilities development in mobile telecommunication and infrastructure development should work towards improvement of Brazilian economy and lead to temporary gains in Brazilian capital markets. Not just Olympics, financial markets are affected by major sports event such as the Football Eurocup and also due to any terror activities. These are macro factors that impact financial markets.

 

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