Brazil's Rio Grande do Sul is facing economic problems after flooding and an unclear path to reconstruction

RIO DE JANEIRO — Floods in the Brazilian state of Rio Grande do Sul destroyed almost everything necessary for economic activity, from local shops to factories, farms and ranches.

The environmental disaster – unprecedented in the state's history – turned transport upside down, including the capital Porto Alegre's airport, which is expected to remain closed for months. Parts of major highways are closed due to landslides, washed-out roads and collapsed bridges. Blackouts continue to plague the state. Governor Eduardo Leite has said that Rio Grande do Sul needs a “kind of Marshall Plan to be rebuilt,” although an exact strategy for doing so in a way that reduces future climate disasters has yet to be determined.

Gilberto Zeni, a shopkeeper in Porto Alegre who has owned his shop for eighteen years, suffered enormous losses.

“This has never happened before. It is very sad to experience a situation like this after so many years of work,” the 50-year-old said.

“But some people paid with their lives. This is a loss of material goods. We are going to rebuild. We are strong,” he added.

The scale of the destruction may be most comparable to that of Hurricane Katrina, which hit New Orleans in 2005, said Sergio Vale, chief economist at MB Associates. It has wreaked havoc on the service sector, manufacturing and sales, and many people are likely to lose their jobs, he said. Rio Grande do Sul's economy – about the size of Uruguay and Paraguay combined – had grown 3.5% this year through April, but could fall 2% in 2024, according to his forecasts. That would mean a 0.4% drop in the country's gross domestic product, which is currently forecast at 2%. Bradesco expects a decline of 4%, which would mean zero growth this year.

Most of the state's 497 municipalities have been affected and financial losses have already reached 10 billion reais ($1.9 billion), the National Confederation of Municipalities estimated earlier this month. About 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 Rio Grande do Sul State.

“The buildings of an infinite number of companies have been completely disrupted. In addition to the huge financial losses, the logistical problems are likely to have a significant impact on the entire economic activity of the state,” the report said in a preliminary study on May 13.

Among the most affected regions are Porto Alegre and the state's northeastern Serra region, home to automotive, machinery and furniture factories. The heavy rains also devastated the Rio Pardo and Taquari valleys, known for their meat industries. According to local bank Bradesco, Rio Grande do Sul accounts for 12.6% of the country's large agricultural GDP. Nearly 70% of Brazil's rice and 13% of dairy products come from the state, according to an S&P Global report May 13.

“It often takes a decade for a flooded municipality to return to its previous level of economic activity,” said Gustavo Pinheiro, a senior fellow at climate change think tank E3G.

The human toll of the rain so far amounts to at least 163 lives lost, while another 72 people are missing. More than 640,000 people have been forced from their homes, including 65,000 seeking shelter in schools and gymnasiums.

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

While the total amount is not yet clear, the costs to the federal budget come as public debt as a percentage of GDP has risen, which could make Brazil less attractive to investors.

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

“The federal government cannot stop itself from supporting a state that has been completely destroyed just because the financial market thinks there is a budget risk,” Beni said.

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

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

After Hurricane Katrina, the federal government spent $14.5 billion on pumps, levees and walls to protect New Orleans, leading to a significant reduction in damage caused by Hurricane Ida in 2021. Tokyo authorities spent billions on a underground drain in the metropolitan area. Others are touting the concept of “sponge cities,” which aim to transform urban areas into natural parks that improve drainage and reduce flood risk.

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

Long-term success, however, will depend on global choices – especially the burning of coal, oil and gas, which drives climate change. Scientists and energy experts have long laid out roadmaps – solutions – to reduce greenhouse gases such as carbon dioxide and methane, which are warming the planet and making climate disasters more frequent. And there is hope for the future, according to the International Energy Agency in its World Energy Outlook for 2023.

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

Politicians from Rio Grande do Sul and the federal government are also at odds over the response to the crisis and reconstruction. As the left-wing ruling government studies a possible canal to speed up the water flowing from the Patos Lagoon to the sea, Leite, right of centre, has said the project would be “very difficult to implement” and could cause damage damage to ecosystems. This was reported by the newspaper O Globo.

The state must adopt legislation that protects the state's environment, says Beni, the FGV economist.

“Climate denial policies that promote the dismantling of environmental laws come at 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 floods again.”

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Associated Press writer Lucas Dumphreys contributed to this report.

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The Associated Press' climate and environmental reporting receives funding from several private foundations. AP is solely responsible for all content. Find AP's Standards for Working with Charities, a list of supporters, and funded coverage areas at AP.org.

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