For more than a decade, Brazil flexed its economic muscle as Latin America’s largest market and one of the fastest-growing economies in the world. The 2016 Summer Olympics, scheduled Aug. 5-21, were supposed to showcase the country’s status and success. But a host of troubles, natural and man-made, have hamstrung the world’s seventh-largest economy as the games approach.
Brazil’s underlying fundamentals haven’t changed. The country has a well-balanced mix of manufacturing, agricultural and mineral resources. Business activity is concentrated in the southeast, particularly around São Paulo—about 435 kilometers (270 miles) from Rio de Janeiro, where the games are taking place.
But over the past several months, Brazil has been hit by escalating debt; falling Chinese demand; lower commodity prices; political and financial crises; weak investment and consumer spending; currency devaluation; higher crime; and fear of the Zika virus, which has dampened business and leisure travel. The result is a deep recession that economists are describing as Brazil’s worst economic crisis in a hundred years. The country’s economy shrank by almost 4% in 2015, and Oxford Economics expects it to contract another 3.4% in 2016.
Business travel industry insight
With 10.4 million visitors in 2015, Brazil is Latin America’s largest international travel market by far. It attracts a third more international travelers than Argentina and twice as many as Chile. Most travelers arrive from Argentina; the U.S. accounts for 11% of arrivals.
Currency devaluation eroded business travel spending by 25% in 2015 and is expected to push spending down by an additional 11% this year (when spending is valued in U.S. dollars). But the underlying situation is less alarming: Oxford Economics reported 5.4% growth in spending in local currency in 2015 and expects spending to decline by 2% in 2016. Growth should return in 2017, the research firm forecasts.
Even without all of its recent troubles, Brazil likely would have seen a temporary dip in business travel during the Olympic Games. When London hosted the event in 2012, 39% of regular business travelers reduced their travel, according to U.K. government data.
Brazil’s hosting of the 2014 FIFA World Cup and the upcoming games spurred hotel expansions. AccorHotels is already well represented, with properties in 23 of Brazil’s 27 states. Other international chains are growing their portfolios. The Brazilian real’s slump against the dollar means it’s a good time to invest, and many local operators want the security of joining with an international hotel brand.
Air travelers largely choose between airlines TAM and Gol for domestic journeys, but rapidly expanding Azul and Avianca Brazil have increased choice. All four airlines have links to one of the global air alliances. Falling demand and rising costs have recently forced TAM and Gol to make sharp capacity cuts, while their smaller rivals have slowed expansion. International airlines also are scaling back some services to Brazil. But they have not abandoned the long-term value of this market: Delta Air Lines, HNA Group, Qatar Airways and United Continental Holdings have invested in Brazilian carriers. American Airlines and IAG are pursuing joint ventures with LATAM, and Delta plans a similar deal with Gol, once a Brazil-U.S. open skies agreement is in place.
- Despite the problems it’s facing right now, with a gross domestic product of US$1.8 trillion and a population of more than 200 million people, Brazil remains a major market for international business.
- The sharp depreciation of the Brazilian real has boosted to Brazil’s competitiveness in export markets. Exports are growing again.
- The expanding supply of global hotel chains helps international buyers find hotels their travelers will know and like. Consolidation also allows buyers to negotiate wider-ranging deals covering more destinations.
- Brazil’s economy can no longer count on the high level of exports and low borrowing costs that drove growth for the last decade. But it’s yet to find alternative catalysts for growth.
- Rating firm Standard & Poor’s withdrew Brazil’s investment-grade status, which means higher borrowing costs will trickle down from government and businesses to households. This could intensify the recession.
- Brazil is in the middle of a political crisis, which is delaying a solution to the country’s debt crisis.