Brazil is suffering from recession and scandal

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 Nicolas 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".

This belief in state intervention included artificially low interest rates, fiscal expansionism, limited returns for private investment in much-needed infrastructure, and petrol and electricity prices fixed below cost. Such measures were supposed to boost growth. Instead they proved toxic. Business investment collapsed. In March, industry confidence fell to its lowest level since 1998.

The good news is that Ms Rousseff has, at least partly, seen the error of her ways. She has handed the reins of economic policy to Joaquim Levy, a hawkish finance minister. The Chicago-trained economist is cutting costs to plug the hole in Brazil's fiscal accounts and so safeguard the country's investment grade rating (losing it would raise financing costs for both households and the government). The austerity is painful, but the price of not acting is even higher. Some growth-enhancing reforms, such as better terms in infrastructure concessions, have been tabled. Financial markets are no longer in a state of panic. There has even been a spate of large private equity deals. After a miserable 2015, growthprospects for next year look some-what better.

More striking is how Ms Rousseff has allowed power to leach from her hands. Each twist in the Petrobras scandal has seen government allies in the ruling coalition erode the grip of the executive. The lower house of Congress is now controlled by a group of regional barons, the Brazilian Democratic Movement party (PMDB). Another PMDB chieftain is head of the Senate. Last month Ms Rousseff handed over the job of political co-ordination to Michel Temer, the PMDB leader and her vice-president.

Worryingly, all this comes as the isolated Ms Rousseff faces another four years in office. For now, economic pragmatism prevails. But it is an open question if she will be able to stick to the new orthodoxy, especially if recession deepens. The Petrobras scandal, pursued by an independent judiciary, may lap closer to the presidency. Social protest is rising. One thing is clear:the rest of Ms Rousseff's term will be gruelling indeed.

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