| | |  Business News | September 2009 
Mexico Violence May Sap 3% of GDP as Gangs Flourish
 Jens Erik Gould & Hugh Collins - Bloomberg
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September 15, 2009
| | President Calderon’s strategy against narcotics traffickers and criminal gangs is under scrutiny one year after a grenade attack at an Independence Day celebration killed eight bystanders and renewed calls for a crackdown. (Bloomberg) | |
Mexican President Felipe Calderon’s fight against organized crime has failed to lessen the economic cost of violence, which wrests as much as 3 percent from gross domestic product, according to Bulltick Capital.
The estimate from Jose Arturo Tobias, an equity strategist at Bulltick in Mexico City, is as much as three times that of the government. Miguel Messmacher, the finance ministry’s chief economist said in December that the country loses 1 percentage point from its annual growth rate because of the bloodshed.
Calderon’s strategy against narcotics traffickers and criminal gangs is under scrutiny one year after a grenade attack at an Independence Day celebration killed eight bystanders and renewed calls for a crackdown. Since the government deployed more Army troops to the drug fight, the pace of killings has only increased. This year, organized crime violence has been blamed for an average 19.8 deaths per day.
“The security issue doesn’t help the economic recovery,” Tobias, 31, said in an interview. “Companies in Mexico say security is an issue and expansion plans are held back.”
Tobias estimates the economic cost of Mexico’s violence is 2 percent to 3 percent of GDP, and the total cost is $120 billion, or about 12 percent of Mexico’s $1.085 trillion GDP in 2008. The estimate by Bulltick, a Miami-based brokerage with offices in four Latin American countries, includes prevention measures, prison costs, lost foreign direct investment and expenses to victims and businesses.
Mexico’s Finance Ministry didn’t respond to a phone call and e-mail seeking comment on Bulltick’s figures.
Investment Decisions
Companies looking to invest in Mexico and send executives to the country are holding back on plans because of the violence, said Marcelo Canales, president of the business trade group Coparmex in Nuevo Leon state.
“One of their questions is always on the violence issue and it’s a factor for them in deciding whether to invest in Mexico, definitely,” said Canales, whose family owns Verzatec SAB, a maker of guard rails and metal electricity towers. “Potential foreign investors think twice.”
A bomb made from butane gas can and fireworks exploded today outside a clothing store in Mexico City’s upscale Polanco neighborhood, newspaper El Universal reported. It was the third similar attack this month in the capital, after explosions at an automobile agency and a bank. No injuries were reported in any of the attacks and only minor damage to buildings.
Crime Reports
News reports in Mexico are filled with stories about police turning up dead by the dozen, discoveries of decapitated bodies, and firefights with drug gangs using assault rifles.
Since taking office in December 2006, Calderon has sent tens of thousands of soldiers to regions where gangs that transport drugs to the U.S. have a stronghold. The strategy has resulted in the arrest of dozens of cartel leaders, record drug seizures, and crackdowns against politicians accused of aiding traffickers.
Still, organized crime has killed 5,018 people this year as of Sept. 10, according to a tally by newspaper El Universal. Last year, 6,277 people were killed, according to government figures. The government hasn’t released an official death count for this year.
The death toll from 2008 includes eight people killed by grenades lobbed into the main plaza in the central Mexico city of Morelia on Sept. 15, just as the state’s governor was giving the traditional Independence Day call of “Viva Mexico.” Those killed and injured in the attack were civilians, marking an escalation in a fight that had been mostly contained to members of drug gangs, police, military and government officials.
Three Arrests
Three people were arrested for the grenade assault, which state Governor Leonel Godoy blamed on drug gangs.
Calderon responded to the attack in Michoacan, his home state, by stepping up efforts to fight police corruption and impunity. In May, Military and police forces detained 10 mayors and 18 other officials in Michoacan for alleged links to the La Familia drug gang, the state’s dominant cartel.
Federal, state and judicial officials signed a National Security Agreement last year pledging to beef up institutions that fight crime and kidnapping. The initiative came after the 14-year-old son of Alejandro Marti, founder of sporting goods retailer Grupo Marti SAB, was kidnapped and killed.
Violence remains a concern among some investors, Joaquin Avila, who manages Carlyle Group’s $134 million Mexico private equity fund, said in an interview.
“These are factors that you can’t deny. It’s on CNN, it’s on Bloomberg, it’s in every media,” Avila said. “I wish these difficulties didn’t exist. But it’s a reality.”
Stock Index
To be sure, Mexico’s main stock index has gained 32 percent this year. Traders who bet against Mexican equities in record numbers two months ago are closing out their positions as Latin America’s second-largest economy heads for a recovery.
The amount of borrowed shares in the 10 biggest Mexican companies dropped Sept. 3 to the lowest level this year, according to New York-based Data Explorers, which follows trading by more than 100 securities-lending firms and 20,000 funds. Data Explorers estimates most of the stock loans are used in short sales, when traders borrow shares and sell them to profit from a decline by buying them back at a lower price.
The cost of crime and violence for doing business is higher in Mexico than in Brazil, Colombia and Chile, Bulltick says, citing the Inter-American Development Bank.
Companies are also affected by merchandise theft, common crime against their workers, and the cost of security services, said Deborah Riner, chief economist for the American Chamber of Commerce in Mexico.
“It’s about much more than just the narco violence,” Riner said. “Because of the security situation, you have additional costs that make you less competitive.”
Markets Last Week
Mexico’s Bolsa index rose 4 percent last week to 29,448.79. Grupo Financiero Banorte SAB, Mexico’s biggest publicly traded lender, led advances, climbing 13 percent after it was rated Barclay Capital’s “top pick” in new coverage of Latin American banks. Grupo Bimbo SAB, the world’s largest bread maker, declined 0.6 percent to 74.26 pesos.
Mexico’s peso advanced 0.2 percent last week, the first gain in three weeks, on speculation that Calderon’s budget proposal will help the country avoid a credit-rating downgrade. The currency strengthened to 13.3372 pesos per U.S. dollar.
Yields on Mexico’s benchmark bond due 2024 fell 5 basis points to 8.25 percent, according to Banco Santander SA. The bond’s price rose 0.4 centavo to 115.06 centavos per peso.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net; Hugh Collins in Mexico City at hcollins8(at)bloomberg.net
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