Can Nothing Be Done?

MEXICO - Report 05 Feb 2016 by Mauricio Gonzalez, Guillermo Valdes, Esteban Manteca and Ernesto Cervera

While economic signals were mixed, economic news in January was overshadowed by a further devaluation of the peso. Until oil prices have clearly bottomed out, we expect the currency to keep weakening. Though these two phenomena are clearly beyond Mexican control, this does not imply that the problem of the currency should be left to work itself out: assurances from the government that no further action is needed are troubling.

Markets are concerned that depressed oil prices and a weaker peso will erode Mexican public finances, now that the country is for the first time running a petroleum trade deficit, and the cost of servicing foreign currency debt is rising. And despite official assurances, public spending was not adjusted last year in keeping with the budget cuts announced 12 months ago; public sector spending for 2015 came in 4.9% over last year’s budget, and 8.6% above what was allowed under the austerity program.

For Mexico to emerge in good shape from this episode, it must take multiple actions, in the fiscal (i.e., cuts to public spending); financial (i.e., raising interest rates more than the Fed has); and FX policy areas (i.e., devising a non-subsidy mechanism to provide liquidity to Mexican companies with foreign currency debt, now struggling to cover those obligations).

The latest high-profile case of the disappearance of civilians in which police allegedly turned the detainees over to an organized crime group is just one more indication of how deeply public safety in Mexico suffers from the lack of an effective security strategy, on either the state or federal levels, to deal with the fundamental problems of local police departments. Local police are the weakest link in the state security apparatus, and the most vulnerable to penetration by organized crime.

The implications of those policy deficiencies are further magnified by the latest official report on high-impact crimes, showing an 8.6% climb in the homicide rate in 2015. Kidnappings fell during the year, but their rate rebounded strongly late in 2015, to produce the first five-month streak of increased kidnappings in half a decade. The situation is particularly alarming in Tamaulipas, where the number of kidnappings (230) is seven times the national average (32.9). Extortion is falling most (-12.65% y/y), but the downtrend is slowing, and we appear to be witnessing a stabilization of such crimes at around 400 cases a month.

Causa en Común’s annual evaluation of Mexico’s state police systems put the national average at 3.9 points out of 10, and noted that several states experiencing severe security crises, including Guerrero and Michoacán, still lack any evaluation systems. The police remain very susceptible to infiltration by organized crime -- as we are now seeing in Veracruz, even though that state ranks high in police professionalization.

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