EFFECT OF VIOLENCE ON MEXICAN INVESTMENT

UNCLAS SECTION 01 OF 02 MEXICO 001536

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, WHA/EPSC AND WHA/MEX
COMMERCE FOR ITA/MAC/NAFTA ANDREW RUDMAN

E.O. 12958: N/A
TAGS: EINV ETRD KTDB PGOV MX
SUBJECT: EFFECT OF VIOLENCE ON MEXICAN INVESTMENT

REF: A. 05 MEXICO 3747

B. 05 MEXICO 4344


1. SUMMARY. Following the Mexican Competitiveness
Institute's (IMCO) announcement that Mexico loses 15 percent
of GDP, or USD 1.8 billion due to crime, business leaders
including the presidents of CCE (Business Coordination
Council, an umbrella group of trade associations); Coparmex
(the National Employers Federation); and the head of the
Mexican Stock Exchange; called for a reduction in violence
for Mexico to avoid losing new foreign investment. U.S. and
foreign businesses and business associations told us that
although security spending is increasing, security has been
an issue for some time and recent violence has not changed
investment attitudes. While businesses may not publicly admit
that crime is affecting investment decisions, it is
increasing their costs. All three Presidential campaigns
have made security issues an important part of their
platforms. END SUMMARY.

VIOLENCE MAY PREVENT INVESTMENT
--------------


2. IMCO found in its study "Security and Competitiveness"
that Mexico loses 15 percent of GDP or USD 1.8 billion due to
delinquency. The Citizens Institute for Studies of Insecurity
recently found that 54 percent of all Mexicans felt insecure.
The true number may be substantially higher as crime is
typically underreported in Mexico. According to the Citizens
Institute for Studies of Insecurity, Baja California and the
Federal District have the highest crime rates. CCE called on
the Secretariat of Government to increase the coordination
between all levels of authorities to fight against the trend.
Alberto Nunez Esteva, President of Coparmex, stated that
"violence is not the friend of investors. Businessmen cannot
invest when they are worried about their physical safety due
to the increase in kidnappings." The Minister of Government,
Carlos Abascal disagreed, noting that violence has been
concentrated in only a few areas, principally along the
border. This is the same opinion that has been expressed by
officials for over a year (REFTEL B). Coparmex went even
further by offering to work with government to decrease
crime, even suggesting an alliance with the U.S. in a fight
against drug related violence.


3. In a recent speech, Guillermo Prieto Trevino, president
of the Mexican Stock Exchange, declared that financial
markets do not do well in times of uncertainty and
insecurity. He admitted that Mexican markets could become
excessively volatile due to the upcoming elections and that
violence could heighten this volatility. The government has
yet to undertake a positive campaign to reduce the violence
and insecurity.

OPINIONS VARY GEOGRAPHICALLY
--------------


4. A recent AmCham study found that companies have doubled
their expenditures on security from two to four percent of
total expenditures over the last three years. AmCham has
proposed the creation of a business security working group
that would coordinate with the federal government to increase
security. It believes the current security environment
imposes an unnecessary cost on its members and could cause
potential investors to look elsewhere. Coparmex, Cemex and
Vitro told econoff in Monterrey that they view the increase
in drug violence as a possible precursor to executive
kidnappings and other crime. Armored vehicles and body
guards are the norm for executives in Monterrey.


5. Econoff met with the Director General of "Aregional," a
public finance consulting group in Mexico. A recent study
completed by their office indicates that the areas in Mexico
that have the highest growth rate also have the most security
problems. Security has played an increasing role in site
selection. Electrolux, which recently completed a large
plant in Ciudad Juarez, told us that they reviewed security
issues at six sites before selecting the most secure site for
their latest investment. A U.S. energy company in the
preliminary stages of determining where to invest overseas
recently contacted post with a list of security questions
about Mexico. COMMENT. This appears to be a paradox that
growth and security issues are occurring in the same area.
Since the implementation of NAFTA, the border region has been
Mexico's largest growth area. Security issues have also
increased dramatically in the region as the government
increases its efforts against narcotics trafficking. END
COMMENT.

MEXICO 00001536 002 OF 002




6. However, companies are more concerned with getting their
product to market than they are with the effect of violence
on personnel. At a recent AmCham event in Guadalajara,
participating firms including the Trade Development Director
for the State of Kentucky told us that they are more
concerned with the threat to their cargo on highways than
they are with violence. The fear of shipments being hijacked
and/or being breached in order to move contraband/narcotics
across the border was an area of concern raised by businesses
in Monterrey as well. This fear has existed for over a year
(Reftel B). Mateo Beja, CEO of Yale Textiles, also told
econoff that he has to pay for escort protection for every
one of his shipments. Despite this he said every year he
loses a few trucks to hijackings. He sarcastically noted
that miraculously the hijacked shipments always seem to be
his high value merchandise.


7. The Director of the Japanese Maquila Association in
Tijuana, Keisuke Matsuo, recently told econoff that his
members view the violence as a war between Mexican drug gangs
with innocent Mexicans caught in the middle, but the violence
does not affect his members. This is a dramatic shift from
last year (Reftel A) when the Japanese Embassy predicted that
all Japanese investment would leave Mexico due to the
security situation. Economic development officials in
Tijuana have recently announced that, although they realize
violence is an issue, they do not want to take steps to
publicize it more widely as it may cause investment to leave
Tijuana for other areas in Mexico.


8. The current security situation is causing some groups to
increase security cooperation. The Customs Trade Partnership
Against Terrorism (C-TPAT) in Ciudad Juarez has discussed
initiating a program in the Hermosillo region. The Consulate
General in Juarez has offered assistance and has noted that
this may be an opportunity to initiate an Overseas Security
Advisory Council (OSAC) in Hermosillo.

FOX GOVERNMENT RESPONSE
--------------


9. Dr. Eduardo Sojo, Chief of the Mexican Presidency's
Office of Public Policy, admitted recently that security was
one of the two principal items that had not been effectively
resolved during the Fox administration. He noted that Fox
had submitted a proposal to have one federal police force
instead of five. Mexico currently has 420,000 police
officers, although only 20,000 are federal officers. The lack
of synergy between police forces has left them unable to
effectively respond to recent security issues, according to
Sojo. In Sojo's view, the security situation in Mexico
requires the collaboration of all levels of government. He
concluded his comments by stating that legislation is needed
to modify the roles of Mexico's security institutions and
that these institutions are not designed to foster consensus
and show the legislature why the laws need to be modified.

COMMENT
--------------


10. Although no business or association was willing to
identify a specific investment that had been lost due to the
security situation in Mexico, our contacts admit that it
increases the cost of business in Mexico, thereby decreasing
competition, and remains a primary concern. Security costs
have doubled over the last two years and companies, while not
afraid to invest, note that they are fearful of losses from
hijacking and security issues. The press suggests that many
organizations may be publicly speaking out about violence to
get the presidential candidates to take a stand on the issue.
The fact that all three candidates have spoken regularly on
the issue and Sojo's admission that the Fox administration
fell short on security indicate that this is more of an issue
than our contacts may want to indicate.


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KELLY