To assess the economic impact of flooding in Rio Grande do Sul, Brazil, it is necessary to look abroad for something similar, such as the destruction caused by Hurricane Katrina in the United States in 2005.
And in Brazil, there has never been so much economic damage caused by a climate event. The evaluation is by economist Sergio Vale, from MB Associados, a consulting firm that monitors the impacts of recent floods on the economy.
In the United States, Katrina caused the economy of the state of Louisiana to contract by 1.5%, in a year when it was forecast to grow by 4%.
In the case of Rio Grande do Sul, MB Associados predicts that the economy will contract by 2%, instead of the 3.5% growth it had been registering in the last 12 months until April.
Furthermore, the impact at the national level will be much greater than what occurred with Katrina in the United States, since the economy of Rio Grande do Sul corresponds to 6.5% of the Brazilian GDP (Louisiana represents 1% of the US economy).
MB Associados predicted that Brazil’s growth for this year would be up to 2.5%. After the tragedy in Rio Grande do Sul, it placed its growth projection at 2%.
Brazil has already faced other major crises that affected the growth of its economy.
In 2001, for example, a drought contributed to a crisis of energy rationing and blackouts.
The national economy, which had grown 4.4% the previous year, slowed to 1.4%. But despite the contribution of the drought, the core of the 2001 crisis was not the weather, but rather bottlenecks in distribution lines, which prevented power from being distributed throughout the country.
This year’s Rio Grande do Sul tragedy, which has already caused at least 149 deaths, will have an impact on at least three fronts of the Brazilian economy: GDP growth, the agricultural sector and public accounts.
The economists and studies consulted for this article point out that the exact magnitude of the economic impact cannot yet be precisely quantified, because the rains continue and a precise assessment of the damage has not yet been carried out.
This lack of definition It also has political implications. The authorities have talked about different measures and amounts to allocate to Rio Grande do Sul, but this aid is still being discussed and the figures are not clear.
Below we explain how floods are expected to affect the Brazilian economy in 2024.
Impact on growth and industry
The floods affected 94.3% of all economic activity in Rio Grande do Sul, according to a study published on May 14 by the Federation of Industries of the State of Rio Grande do Sul (Fiergs).
“The most affected localities include the main industrial centers of Rio Grande do Sul, impacting important segments of the state’s economy,” said the interim president of Fiergs, Arildo Bennech Oliveira.
Three of the largest affected regions (Porto Alegre Metropolitan Region, Vale dos Sinos and Serra) contribute R$220 billion ($42.83 billion dollars) to Brazilian economic activity.
These three regions They concentrate 23,700 industries that employ 433,000 people.
The Sierra Region (with cities such as Caxias do Sul, Bento Gonçalves and Farroupilha) is famous for production in the metalworking (vehicles, machines, metal products) and furniture segments.
The Metropolitan Region of Porto Alegre also produces metalwork (vehicles, auto parts, machines), as well as oil and food products. The Vale dos Sinos region is famous for its footwear production.
But other sectors of the economy were also affected, such as tobacco and chemicals.
A study conducted by Bradesco predicts that the impact of the crisis in Rio Grande do Sul could reduce national GDP growth by between 0.2 and 0.3 percentage points.
“For comparison, when the state was hit by a cyclone in 2008, state GDP growth that year was 2.9%, compared to growth for Brazil as a whole of 5.1%.”
Another study, carried out by the National Confederation of Municipalities, estimates the financial losses due to floods in more than R$8.9 billion ($1,732 million dollars).
According to the CMN, of this loss $467 million dollars correspond to the public sector, $370 million to the private productive sector and $895 million specifically to destroyed homes.
Agricultural impact
Rio Grande do Sul is one of the powerhouses of Brazilian agriculture: the state represents 12.6% of the national agricultural GDP.
As a whole, Brazilian agriculture will be one of the sectors of the economy most affected by the floods, according to Bradesco.
“Considering such impacts, agricultural GDP in Brazil could fall by 3.5% (our previous estimate was a 3% drop). Losses in agribusiness could be increased by logistics, which affects both the flow of the harvest and the arrival of inputs. “This appears to be a major problem for the dairy and meat sectors,” a bank report states.
Rio Grande do Sul accounts for 70% of Brazil’s rice production, 15% of meat (12% of chicken production and 17% of pork production), 15% of soybeans and 4% of corn.
The floods caused impacts on some international prices: the world price of soybeans on the Chicago Stock Exchange increased 2% last week.
In Brazil, the price of rice has already risen and the government announced the importation of the product to avoid an even greater shock. It is feared that chicken and pork prices may also rise soon.
Luckily, 70% of the soybean crop and 80% of the rice crop had already been harvested.
Two questions now remain: how much of the rest of the harvest was affected by the floods and whether the amount already harvested and stored in silos was compromised or not.
Bradesco estimates that 7.5% of rice production and 2.2% of soybean production in Brazil could be compromised if the worst scenarios are confirmed.
Vale, from MB Associados, recalls that the agribusiness of Rio Grande do Sul had already suffered a lot in the last three years with climatic extremes.
“In Rio Grande do Sul, the agricultural issue in recent years has placed the state at a level of great insecurity. There were three consecutive years of La Niña, with very deep droughts and very severe crop losses. Last year, the state even celebrated the arrival of El Niño, which would bring rain. But when we thought we would have a normal year, suddenly this happens,” says the economist.
There is still a possibility of a new La Niña phenomenon this year, with the potential to cause new droughts in Rio Grande do Sul.
Tax impact
Another important impact of the floods in Rio Grande do Sul will be seen in public accounts.
For years, Brazil has been trying to balance its fiscal situation; That is, the government has made an effort to raise more money than it spends, producing what is called a fiscal surplus.
This fiscal surplus is used to reduce the government’s public debt, which is a fundamental element of any country’s economy.
High debt has the potential to produce high inflation, low economic growth and unemployment.
Last year, Lula’s government launched what it called the “fiscal framework”: the set of rules for spending public resources and making investments. This framework was essential to calm the markets and signal that Brazil would not spend money unrestrainedly.
But last month, faced with budget problems, the government gave up on achieving surpluses in 2025.
Economists point out that Brazil’s public accounts were already going through a delicate moment before the floods in Rio Grande do Sul.
However, the situation will get much worse now that the federal government will have to provide significant financial assistance to the state.
For example, a plan has already been announced that will be sent to Congress to suspend for three years the collection of the debt that the state of Rio Grande do Sul has with the Brazilian government.
The rule would allow the creation of an “accounting” fund of US$2.141 billion a year to help rebuild the state’s infrastructure devastated by the floods, according to Finance Minister Fernando Haddad.
The measure also includes the forgiveness of debt interest, with an impact of US$2,336 million.
The federal government He had already announced last week a package of measures that could reach $9,928 million dollars.
This week the federal government announced reconstruction aid worth $973 per registered family, which will cost the coffers $234 million.
Part of public spending will be outside the government’s fiscal rules, because Rio Grande do Sul is in a state of calamity.
All of these measures are essential to rebuild Rio Grande do Sul, but they have the potential to worsen the Brazilian fiscal situation, which was already suffering before the crisis caused by the climate event.
Sergio Vale, of MB Associados, warns that throughout the year it is possible that more money will be sent to Rio Grande do Sul through extraordinary credits approved by Congress, and that this could worsen the Brazilian fiscal balance.
He says it’s difficult to quantify exactly how big Brazil’s fiscal problem will be, because it’s not yet known how much money will be needed to rebuild Rio Grande do Sul.
For Caio Megale, chief economist at XP, some of the aid will be outside the government’s fiscal framework, but even if it were necessary to include these expenses in the budget, it would be possible to accommodate them.
“No one really knows what the total amount of support will be. There is talk of $14,000 million dollars or $19,000 million. We can’t know yet, we have to wait for the waters to subside. But the fiscal framework has room for these measures to be taken,” Megale said this week.
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