Latin Finance - May/June 2011 - 28

mexican corporate outlook

In the Line of Fire
by Natalie Feary

espite the Mexican government’s efforts in the war on drugs and GDP growth of 5.5% in 2010, a majority of companies in a recent survey on security say Mexico is now more dangerous than a year ago. Companies say they are increasing the amount they are spending on security measures. Kroll, a risk mitigation firm, received almost double the response to its survey on the impact of security on the private sector than it received last year, according to David Robillard, managing director of Kroll’s Mexico office. “The issue of security is definitely top of the mind as it is seen as one of the factors that contribute to investment decisions.” Kroll’s survey, conducted together with American Chamber of Commerce of Mexico, received over 500 responses to its 2011 survey from directors of foreign and local companies in the service, manufacturing and logistics sectors. Of the companies that responded, 67% consider the situation less secure today than in 2010. Almost 60% say they are raising their level of security spending in reaction to an increase in organized crime. A mere 11% of respondents expect the security situation to improve within the next 12 months.

Transport, tourism and housing are just some of the sectors susceptible to Mexico’s deteriorating drug violence. Security costs are becoming a concern for Mexican companies.
global markets at Banorte, though the worst could still be to come. The government is quick to say that Mexico is ripe for investment, and that the situation is under control. Others are not so sanguine. “The government is totally in denial about what is happening, downplaying the scale of the violence, which is totally undermining its credibility,” says one Monterrey-based executive, who asks not to be identified because of fear of attacks from drug gangs. “The recovery of Mexican corporates has been robust, but the violence could definitely slow and dampen it,” says Daniel Kastholm, MD of LatAm corporates at Fitch ratings. Robillard: New investments being put on hold violence from the drug war is definitely contributing to Mexico not growing more,” he says. According to Alonso Cervera, chief LatAm economist at Credit Suisse, crime remains one of the main obstacles to higher growth in Mexico. “Violence is not just about the number of homicides. It is about kidnapping, insecurity and extortion, which all affects consumption and investment decisions nationwide. While foregone consumption is difficult to measure, it involves less spending in the economy,” he says. Representatives from the government decline to comment on the impact of violence on Mexico’s GDP. Drug violence could be stealing 1%-2% from Mexico’s GDP, according to estimates from Alfredo Thorne, head of

Security Spending Up

GDP Impact

Mexico has experienced a strong economic recovery in the wake of the financial crisis, with GDP growth in 2010 at around 5.5%. The finance ministry forecasts GDP growth of 5.0% for 2011. However, growth would be higher if it were not for the violence, says Richard Sinkin, partner of InterAmerican Holdings, a company that advises investors on Mexico. He says this means companies are starting to increase spending on private security. “Mexico is benefitting from internal demand and the rising price of commodities, but the

According to the finance ministry, 3%4% of the Mexican government’s budget goes towards security. However, only 20% of those responding to Kroll’s survey say efforts by the Mexican authorities are improving the situation. “The added security costs will make it difficult for smaller companies to open operations, and this will wear on Mexico eventually,” Sinkin says. Over 50% of responders to the survey say they would increase spending on security in the next one to two years. Of those, 40% will spend an average of 2% of operating costs on security and almost 30% will spend 2%-4%. Average private expenditure on security in LatAm is 2%, though it is still much lower than in the US. Private security spending there is closer to 7%.

28 LatinFinance

May/June 2011

Latin Finance - May/June 2011

Table of Contents for the Digital Edition of Latin Finance - May/June 2011