In a world of near-zero interest rates, how about this? Last week, Brazil’s central bank increased its main interest rate to 13.25 per cent. The 50 basis-point rise is part of Brazil’s efforts to put its house in order. The economy is expected to shrink by 1 per cent this year, the deepest recession in 25 years; unemployment is rising; while inflation is running at over 8 per cent — almost twice the official target, hence the rate rise. After years of fast growth and easy credit, Brazil is on its back.
Latin America’s biggest economy is also reeling from a corruption scandal at Petrobras, believed to be the largest in national history. Release of the state-controlled energy company’s long-delayed results last month estimated losses, due to corruption, of more than $2bn — much of them due to political kickbacks. Combined with the recession, this has savaged President Dilma Rousseff’s standing. Even in a region of weak leaders, her dismal approval rating stands out. At 13 per cent, it is lower even than that of Nicolás Maduro, the president of Venezuela.
There are three main reasons for Brazil’s gloom. China’s slowing economy has punctured the commodity price boom forcing Brazil, and other commodity countries in the region, to tighten their belts. The prospect of higher US interest rates threatens to suck international liquidity out of the country. Most of all, it is paying the cost of Ms Rousseff’s mistaken faith during her first term in so-called “developmentalism”.
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