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São Paulo: Worries Grow as Serious Drought Grips Brazil's Largest City

Sao Paulo Region Suffers From Extreme Drought

A plane flies over the Atibainha dam, part of the Cantareira system of reservoirs that supply the State of Sao Paulo, during a drought on Feb. 23, 2015, in Braganca Paulista, Brazil. Victor Moriyama / Getty Images file

One of the world's most populous cities is running out of water.

São Paulo, Brazil, is in the grips of the city's worst drought in the last half-century. The city's main water supply—called the Cantareira system—is running on emergency reserves. Normally this time of year, the city's main supply would hold more than 155 billion gallons of water. But that water is all gone, and the government has been forced to tap into emergency reserves.

"São Paulo's current drought emergency is both unprecedented and unpredicted," said Juliana Garrido, senior water and sanitation specialist for the World Bank.

Before the 2014 drought, the system was supplying about 8,700 gallons of water a second, according to the World Bank. Today, it's operating at 3,563 gallons per second, according to data from Brazil's National Water Agency.

Drought Exposes Ruins of Old City in Brazil 0:51

Martha Lu, a 43-year-old resident of São Paulo and water activist, said that she has seen neighbors fight over water access during temporary water shut-offs. She said she had spoken to a woman who was disposing of human waste in plastic bags so she could avoid buying expensive mineral water to fill her toilet.

The problem is even more acute in the suburbs of the city, which tend to be poorer than the city itself.

"They have two hours of water on tap—the women don't sleep because the water comes in the early hours of the morning, at around 4 a.m.," Lu said of suburban areas. "They don't have water storage, so they have to stay awake because they don't know when the water is coming again. They stay up to collect it in buckets and try to do laundry, it's terrible."

Beyond the dire situation for residents of São Paulo, the drought could threaten investors with money in Brazil, one of the so-called "BRIC" emerging-market economies that also include Russia, India and China. Though Rio de Janeiro is bigger, and Brasilia is the capital, São Paulo is the financial center of Brazil, which with an annual GDP of $1.9 trillion is the world's eighth-largest economy.

"American financial market investors in Brazil should be aware of the water shortages in the country, given their knock-on impacts on electricity prices, headline inflation and business confidence," Katherine Weber, head of Americas Country Risk Analysis at Fitch Group's BMI Research unit, told CNBC.

Brazil is seeing rising electricity prices and inflation as a result of São Paulo's water situation, according to Weber. São Paulo relies heavily on hydropower for electricity.

Read More: Not Just California: Droughts Extend Across Americas

"While we believe the bulk of the upward adjustments to electricity prices this year have taken place, additional increases would further dampen consumer and business sentiment," Weber said.

Those strains to hydropower could create an upside for other sources of power, however. Interest has grown in alternative energy sources aside from hydropower over the last few years.

"Although a number of large hydropower projects are under construction, recent auctions have seen other power sources take a growing share of new capacity to be developed, including wind over the last few years and more recently solar and natural gas. Solar in particular has a bright future in Brazil," said Michelle Karavias, head of global infrastructure at BMI Research.

Critics allege that the government missed chances to tackle the crisis as the first warning signs began last year. Water rationing could have helped head off the problem, said Carlos Lima, adjunct professor at the Universidade de Brasilia, but 2014 was an election year, and such steps were seen as politically unpalatable. Rationing was finally announced this year, but it may be too late for reduced consumption to have much of an effect.

"Now, when you look at these levels, things are really, really bad. I'm not sure what you can do now for a solution," said Lima, who develops statistical models designed to improve water management. "Even if you reduce the water consumption for the city, you don't have the water."

Read More: Droughts Worldwide May Have an Effect on American Dinner Plates

Brazil's state-owned water and waste management company, Sabesp, did not respond to a request for comment. The Brazilian government also did not respond to requests for comment.

Sabesp plans to transfer water among existing reservoirs to help mitigate the situation, according to the World Bank. It's also put financial penalties and incentives in place in an effort to curb water use.

São Paulo's crisis comes as water demand is spiking internationally. The global thirst for water is projected to increase by 55 percent by 2050, due to growing demand from manufacturing, thermal electricity generation and domestic use, according to a recent a recent report from the Organisation for Economic Co-operation and Development.

CORRECTION: This article was updated to correct a quote by Martha Lu, who said that she has seen neighbors fight over water access during temporary water shut-offs.