Brazil’s Rio Grande do Sul faces economic woes after floods, and an unclear path to rebuilding

Flooding in Brazil’s Rio Grande do Sul state ravaged nearly everything needed for economic activity, from local shops to factories, farms and ranches

Flooding in Brazil’s Rio Grande do Sul state ravaged nearly everything needed for economic activity, from local shops to factories, farms and ranches.

The environmental catastrophe — unprecedented in state history — upended transportation, including the airport in capital Porto Alegre, which is expected to remain shuttered for months. Segments of major highways are closed due to landslides, washed-out roads and collapsed bridges. Blackouts continue to plague the state. Gov. Eduardo Leite has said Rio Grande do Sul will need a “kind of ‘Marshall Plan’ to be rebuilt,” although an exact strategy to do so in a way that reduces future climate disasters has yet to be determined.

The scale of devastation may be most comparable to Hurricane Katrina, which hit New Orleans in 2005, said Sergio Vale, chief economist at MB Associates. It has wrought havoc on services, production and sales, and many people are likely to lose their jobs, he said. Rio Grande do Sul’s economy — about as big as Uruguay and Paraguay combined — had been growing at 3.5% this year through April, but could end 2024 falling by 2%, according to his forecasts. That would mean a 0.4% dent in the nation's GDP, currently forecast at 2%. Bradesco is expecting a 4% drop, which would mean zero growth this year.

Most of the state’s 497 municipalities have been affected and financial losses already amount to 10 billion reais ($1.9 billion), the National Confederation of Municipalities estimated earlier this month. Some 94% of the state’s economic activity has been disrupted in some way, according to an estimate last week by the Federation of Industries of the State of Rio Grande do Sul.

“An infinite number of companies have had their premises completely disrupted. In addition to the huge financial losses, the logistical problems are likely to have a significant affect on all of the state’s economic activity,” it said in a preliminary study May 13.

The most-affected regions include Porto Alegre and the state's northeast Serra region, home to vehicle, machinery and furniture factories. The heavy rains also thrashed the Rio Pardo and Taquari valleys, known for their meat industries. Rio Grande do Sul accounts for 12.6% of the nation’s powerhouse agricultural GDP, according to local bank Bradesco. Almost 70% of Brazil’s rice and 13% of dairy products come from the state, according to a S&P Global report May 13.

“It often takes 10 years for a flooded municipality to return to its prior level of economic activity,” said Gustavo Pinheiro, a senior associate at the climate change think tank E3G.

The human toll of the rains is at least 163 lost lives so far, with another 72 people still missing. More than 640,000 have been forced from their homes, including 65,000 who are sheltering in schools and gymnasiums.

Brazil’s federal government has announced a package of 50.9 billion reais ($10 billion) for employees, those on public assistance, the state and municipalities, companies and rural producers. But as time passes and the water levels remain high, the amount needed to rebuild continues to rise, said Vale. He estimated it could reach 120 billion reais ($29 billion).

While the total needed is not yet clear, the cost to the federal budget comes as public debt as a percentage of GDP has been rising, which might make Brazil less attractive to investors.

Carla Beni, an economist at the Getulio Vargas Foundation, a think tank and university, said that should not be held against the flooded region.

“The federal government cannot refrain from supporting a state that was completely devastated just because the financial market thinks there is a fiscal risk,” Beni said.

The heavy rains that caused flooding can mostly be ascribed to human-driven climate change, according to an assessment published on May 10 by ClimaMeter, a scientific climate modeling team at Paris-Saclay University in France.

This month's flood was the fourth Rio Grande do Sul suffered in a year, following floods in July, September and November 2023 that killed 75 people in total. Since 2000, flood-related disasters across the planet have increased by 134% over the two previous decades, according to a 2021 report by the World Meteorological Organization. Countries have invested in huge infrastructure projects to prevent flood damage.

After Hurricane Katrina, the federal government spent $14.5 billion on pumps, dikes and walls to protect New Orleans, leading to a significant reduction in the damage caused by Hurricane Ida in 2021. Tokyo’s authorities spent billions on an underground drainage channel in the metropolitan area. Others tout the concept of “sponge cities,” which aim to transform urban areas into natural parks that improve drainage and reduce flooding risks.

On Friday, President Luiz Inácio Lula da Silva signed a law suspending Rio Grande do Sul’s debt repayment for three years. Funds that would have repaid debt to the federal government must instead be used to combat and reduce the damage caused by the floods. Finance Minister Fernando Haddad said his ministry will help large companies in the state recover.

Long-term success will rely on global choices, however — especially the burning of coal, oil and gas that is driving climate change. Scientists and energy experts have long laid out roadmaps — solutions — to reduce greenhouse gases like carbon dioxide and methane that are heating up the planet and making climate disasters more frequent. And there’s hope for the way forward, the International Energy Agency said in its World Energy Outlook for 2023.

At the same time, the state will need to rebuild in a way that reduces vulnerability. Rio Grande do Sul built dikes in the aftermath of massive flooding in 1941, but those proved insufficient this year due to a lack of maintenance. A group of experts has already called for more robust flood control. Homes and businesses may also need to relocate away from the coast and riverbanks.

Politicians from Rio Grande do Sul and the federal government are also clashing over response to the crisis and reconstruction. While the leftist ruling government is studying a possible canal to speed water flowing out from the Patos Lagoon to the sea, right-of-center Leite has said the project would be “very difficult to carry out,” the newspaper O Globo reported.

The state must pass legislation protecting the state’s environment, said Beni, the FGV economist.

“Climate denialist policies that favor dismantling environmental laws exact a very high price,” she said. If nothing is done, she said, “Rio Grande do Sul will experience these tragedies every two or three years. There won’t be time to rebuild before it is flooded again.”

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