Squeezing cash flows in Mexico

By Dave Anderson:

The violence in Mexico is generating significant negative externalties.  Business Week reports that the violence related to the multiple cartel on cartel and government versus the collective cartels wars is having a significant drag on economic growth:

The violence is shaving 1.2 percentage points off the economy annually, Finance Minister Ernesto Cordero said today. That’s more than the government’s previous estimate of 1 percentage point....

Moody’s currently rates Mexico Baa1, the third-lowest investment grade rating. Mexico’s rating was cut one level by Standard & Poor’s in December and one level by Fitch Ratings in November after tumbling oil output and the worst recession since the 1930s swelled the budget deficit....

Violence is shaving 20% to 25% of potential economic growth in Mexico.

And that is before the cartels or any other non-state actors have started to target the Mexican governments' hard currency cash cows of oil exports, light manufacturing exports, tourism and remittances.  Most of the violence has been concentrated at the cartel versus cartel turf establishment and stealing level or the cartel versus government security force strategically defensive level.  

We are starting to see signs of violence spreading out of the major drug cartel home bases and into Monterrey and other major manufacturing cities.  Blockades and bandhs are being used to restrict movement, impose uncertainty taxes and channel security forces into predictable patterns in Monterrey.  Foreign owners, consultants as well as highly skilled Mexican workers are under an increasing kidnapping for ransom threat.  If there are take-downs of the electrical transmission infrastructure that moves power from the hinterlands to the urban core, Monterrey's export engine falters.  If kidnapping for ransom increases, the cost of doing business in Monterrey increases in comparison to safer locations like China. 

The cartels have just begun to innovate and move into the deployment of effective improvised explosive devices.  If they go the path of Sunni Arabs in Iraq, or MEND in Nigeria, they can hammer the internal fuel distribution network as well as elements of the oil export network.  If that happens, both the industrial production of the north is hampered as oil prices spike due to the distribution premium and the Mexican federal budget goes south quickly as oil revenue makes up over a third of the budget.  Car bomb and IED attacks against popular tourist towns would put a significant crimp on that revenue stream as well.

The cartels are already able to exact a fairly significant economic cost.  I do not expect significant escalation from cartels that are relatively happy and successful under the current environment.  However the cartels and other criminal/non-governmental armed actors that believe they are losing under the current rule set have significant and readily achievable escalation options that could inflict significant costs on the Mexican government, population and economy.