If Mexico wants economic growth, they need to focus its efforts on the security crisis. Environmental – Social -Governance (ESG) investors could play an important role in both shaping and financing security policy.
We all know that violence is a problem in Mexico. What few know is how much it is costing the economy. The Institute of Economics for Peace estimates that violence costs Mexico 25 percentage points of GDP, per year. That estimate takes into account not only the direct costs, but the indirect costs, meaning the foregone consumer purchases, and the abandoned investments.
If you consider that close to one out of every three people in Mexico have witnessed a murder, the loss of 25% of GDP may come into sharper focus. If you and your neighbors had witnessed murders in your town, how would your life and investment plans change?
In October last year, Mexican security forces captured Ovidio Guzmán, the son of the former head of the Sinaloa Cartel, known as “El Chapo”, who is now in custody in the US. Moments later, the Sinaloa Cartel surrounded security forces, took hostages, burned cars and unleashed mayhem in the city. They executed a soldier and sent a video to the top brass. They brought the government to its knees and returned their heir to the throne. It is not the first time that the cartel outsmarts the Mexican government. Ovidio’s father escaped from prison via a massive tunnel that was dug underneath his prison cell. With so many fantastical stories, it may be hard to know which tops the other or to decipher which, if any, matter.
The truth is that the failed capture of Ovidio Guzmán was an inflection point for Mexico. It is different than all other wild drug lord stories and headlines. It will forever be the day that Mexico’s best was defeated and humiliated. The day Mexico’s top security surrendered themselves to a beastly drug cartel.
The event has no doubt emboldened organized crime. Last month, a cartel assault force rolled into a town near the Texas border and gunned down the city hall, killing 20 people. The motive for the attack is not known and is unlikely to be investigated.
Coupling these events with AMLO’s lackadaisical approach to security, the situation is likely to get worse. Rather than saying that criminals need to heed of their grandmothers, AMLO should make criminals take heed of the country’s top security forces: the Mexican Navy. That, however, is unlikely to happen without additional investment.
Mexico spends less than 1% of GDP on defense – one of the lowest rates in the region. It is not because the country is financially constrained. Mexico’s ratio of gross debt to GDP is 53 percent. For perspective, the US has a debt to GDP ratio of 104 percent. Mexico’s fiscal deficit is also a modest 2.6 percent of GDP, which compares to a deficit of 3.8 percent of GDP here in the US. Given the low debt levels and a modest fiscal deficit, there is room to provide additional support to the country’s domestic security.
One measure Mexico should consider is tapping into the ESG investor base, such as through “green” bonds. Colombia successfully issued peace bonds to finance the fight against drug cartels, Mexico might consider the same. Doing so may provide cheaper financing as green bonds have been known to price at tighter spreads than traditional bonds.
European and US ESG investors I imagine would choke on the thought of using “green” funding for military purposes. The Mexican military’s reputation for human rights abuses would likely come up as a number one objection. There will be others that decry the lack of transparency that exists with military spending, opening the way for higher levels of corruption.
But that is because the investor in the developed world associates the military with foreign conflicts. They do not know what it is like to live in a country that is not ruled by the elected government. They have never had to pay a toll to the cartel boss in order to drive down a street or get to work. They also may not know that human rights abuses are not exclusive to the Mexican military. Abuse of power happens at all levels of police forces, and that is precisely why the country needs to invest in more training and better-qualified personnel.
Colombia’s peace bonds were issued in the domestic market, to investors that understood the need and reasons for it. Mexico could do the same. Alternatively, the global ESG investor could embrace the idea, and help the Mexican government create guidelines and covenants that would minimize corruption and ensure the monies are well invested.