Surge in violence heightens risks in Mexico

Mexico’s next president, veteran leftist Andrés Manuel López Obrador, will face an array of challenges on taking office on 1 December 2018. His immediate focus will likely be on improving the security climate, which has significantly deteriorated in the last three years.

Summary

Since 2015, Mexico’s security situation has gradually deteriorated as the presence and influence of organised criminal groups, most notably drug cartels, has expanded throughout the country. Several factors have contributed to the worsening of the security situation, including a significant reduction in the internal security budget, the proliferation of drug cartels, and widespread corruption and criminal infiltration of law enforcement agencies. This surge in insecurity has caused numerous firms to suspend or terminate Mexico-based operations in the last eighteen months, including PepsiCo, Coca-Cola FEMSA and Grupo Lala. The election of leftist Andrés Manuel López Obrador as the country’s next president on 1 July has important implications for Mexico’s internal security.

Business and security overview

Mexico has long presented a wide array of business opportunities and risks. While the country benefits from its large and skilled labour force, close integration in North American supply chains and significant natural resource endowment, challenges include multifaceted security threats, weak rule of law, widespread bribery and corruption, and intellectual property rights abuses, among others. Despite these threats, the country’s openness to foreign direct investment (FDI) has helped attract significant quantities of foreign capital since the North American Free Trade Agreement (Nafta) came into force in 1994.

The origins of the current levels of violence can be traced to 2006, when then-president Felipe Calderón launched a highly militarised war on the country’s drug cartels soon after assuming the presidency. Although Calderón’s hard-line approach led to the arrest of high-profile cartel leaders, such as José de Jesús Méndez Vargas of the La Familia cartel, it did little to re-establish the rule of law and break up the drug gangs, instead leading to bloody wars of succession, cartel fragmentation and the loss of approximately 60,000 lives during his presidency (2006-12). While the current president, Enrique Peña Nieto, has sought to disassociate his government’s security policy from that of his predecessor, the armed forces continue to play a central role in tackling drug cartels.

The first half of Peña Nieto’s presidency saw a modest decline in the national murder rate and the detention of various drug kingpins, including the powerful Sinaloa cartel leader Joaquín ‘El Chapo’ Guzmán in January 2016. The second half of his term, however, has seen a significant worsening of public security across almost all parts of the country, with the expansion of cartels and other criminal groups occurring throughout most of the republic, including in areas such as Mexico City and Cancún where numerous foreign-owned firms operate. Recently released murder statistics show that May 2018 was the deadliest month on record, while 2017 was the most violent year in the country’s history, with over 28,000 killings. The government has legislated in an effort to reduce the violence, passing a controversial Ley de Seguridad Interior which legalised the military’s participation in law-enforcement activities, but the current security strategy has had little success. For businesses across Mexico, rising insecurity is posing growing risks to operations, especially in areas which used to be considered safe.

This worsening of the security environment comes as Mexico emerges from its most significant general election in a generation. On 1 July, voters elected veteran leftist Andrés Manuel López Obrador of the Movimiento Regeneración Nacional (Morena) party to lead the country for the next six years. The various implications of López Obrador’s victory for Mexico’s internal security are discussed in greater detail below.

The geography of (in)security

As the map of U.S. State Department state-level travel advice illustrates, the intensity of insecurity and crime vary greatly across Mexico. Broadly, violence is most prevalent in the north and along the Pacific coast.

Despite an increase in violence across 28 of the country’s 32 federal entities in the last year, Mexico remains a country of extreme contrasts in the security domain

Three parallel conclusions can be drawn from an analysis of the map. Firstly, despite an increase in violence across 28 of the country’s 32 federal entities in the last year, Mexico remains a country of extreme contrasts in the security domain. Although violence has spiralled out of control in the pacific coast city of Acapulco, Guerrero – the city now has the third-highest murder rate worldwide – the state of Yucatán on the Yucatán peninsula has a homicide rate which, at 2.1 per 100,000 people, is similar to that of European countries such as Malta.

Secondly, it is vital to go beyond the state level of analysis to fully understand local security dynamics, especially when considering possible investments. While the above travel advice shows the Caribbean coastal state of Veracruz to have a relatively low security risk, it has pockets of severe criminality and violence such as the port of Coatzacoalcos and the city of Córdoba.

Various areas which were recently considered safe have witnessed rapid deteriorations in security.

Finally, various areas which were recently considered safe have witnessed rapid deteriorations in security. Recent crime figures have revealed that insecurity has risen rapidly in areas such as Estado de México, which surrounds three-quarters of Mexico City, and the popular tourist state of Guanajuato in the centre of the country. The general deterioration in the security environment has led various corporates to scale back operations in Mexico in the past eighteen months.

As shown in the previous map, major corporates have suspended or terminated activities in the previous eighteen months in the least-safe regions of the country, such as the states of Tamaulipas and Guerrero. In these cases, intimidation, extortion, and threats of violence from drug cartels have been the main reasons for quitting the country. It is important to note, however, that while these cases highlight an emergent trend, they represent a very small proportion of firms operating in Mexico.

Outlook

In the six-month outlook, the prospects for a significant improvement in the security environment are low. The outgoing administration lacks both time and the necessary political will and capital to overhaul the flawed security framework and oversee its effective implementation. Firms considering market entry during the second half of 2018 should carefully analyse the evolving security panorama and carry out detailed security threat assessments and due diligence on potential sites and partners.

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