U.S. Markets open in 5 hrs 26 mins

Venezuela's Political Crisis Deepens

Protests in Caracas and other large cities that began Feb. 12 will hurt an already weak Venezuelan economy. Students began protests amid soaring inflation, worsening shortages of basic items and rampant crime. The opposition offered tepid support initially, but the government’s response, resulting in the deaths of two students, have brought wider support. The situation heated up Tuesday after the government detained opposition leader Leopoldo Lopez, saying he instigated the disruptions Feb. 12.

Lopez’s arrest will keep students and others on the streets for days or weeks, further interrupting economic activity. The protests have all but paralyzed some larger cities, forcing many firms to close or reduce hours. The protests have also paralyzed the government, which faces the highest inflation rate since 1997 and a recessionary economy. The worsening political crisis is likely to freeze foreign investment; Venezuelan bonds have slumped in recent weeks as markets discount the government’s ability to meet its financial obligations.

Venezuela last saw demonstrations of this magnitude during 2002-2003 general strike let by oil workers, which triggered the country’s worst recession in decades. The economic impact will not be as severe this time since the oil industry is not involved. Yet, as in 2002-2003, protests could radicalize the government, possibly leading to new expropriations and more controls, further eroding the economy’s long term growth potential.

Juan Pablo Fuentes is an Economist at Moody's Analytics.

More from Dismal Scientist: