Mexico: Drug War Dents Economic Recovery


By Antonio Guerrero

While Mexico’s economy is recovering from its worst recession in 80 years, the spread of drug-related violence is hindering a more dynamic rebound.

The drug war has claimed more than 30,000 victims since president Felipe Calderón took office in December 2006. Last year alone, more than 15,000 people were killed, a 70% increase over 2009 deaths.

“The rising wave of drug-related violence appears to be dampening confidence, retail and commercial activities, possibly weighing on a more robust investment and economic outlook,” said Shelley Shetty, head of Latin American sovereigns at Fitch Ratings, when the agency affirmed Mexico’s ratings in January. Its foreign and local currency issuer default ratings are BBB and BBB+, respectively, with a stable outlook.

Shetty noted that, while the economy has been aided by favorable external trade performance, namely a gradual recovery in the US, which buys 80% of Mexican exports, domestic demand remains weak amid eroding investor and consumer confidence. Electrolux and Whirlpool cited violence among the factors influencing their decisions not to expand local operations. Tourism could also be affected, with 15 beheadings in Acapulco and another beheading and homicide in Cancun, all within the first week of the year, raising concerns and sparking travel warnings.

According to a poll of private analysts conducted by the nation’s central bank in December, the government has to find a way to improve public safety in order to boost private sector spending. When asked which factors would limit economic growth this year, analysts cited “problems of public insecurity” alongside domestic and global market weakness.

The same poll predicts Mexico’s economy will grow 3.6% this year, while Mexican government forecasts suggest it will top 4%. The economy expanded 5% in 2010, after plunging 6.5% in 2009. Fitch says the five-year GDP growth average was 1.5%, below the median for Mexico’s ratings peers.

Violence is expected to rise further, however, as drug kingpins seek to influence state elections this year, and the 2012 presidential race. Meanwhile, some US legislators are calling for an expansion of the Mérida Initiative, a three-year, $1.3 billion US program to help Mexico tackle the drug trade because, they contend, it also poses a threat to US security.

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