Mexico's Drug War Creates `Medium-Term' Risk for Debt Rating, Moody's Says

Mexico’s increasing violence poses a risk to the nation’s credit rating in the “medium term” and may threaten economic growth, Mauro Leos, an analyst at Moody’s Investors Service, said.

Economic data has yet to show an impact this year and Moody’s probably won’t downgrade the country before President Felipe Calderon’s term ends in 2012, Leos said.

Deaths related to drug trafficking have spiked during Calderon’s term as the government battles organized crime. 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.

“Any impact on the rating because of violence won’t happen this year,” Leos said in an interview in Mexico City. “All the information about the violence until now has been anecdotal. There is no framework in which to discuss the impact of the violence.”

Violence related to organized crime has killed more than 28,000 people since Calderon began battling drug gangs when he came to office in December 2006.

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.

Seeking Data

The yield on Mexico’s 10 percent bond due in 2024 has fallen 153 basis points, or 1.53 percentage points, this year. The yield rose 11 basis points to 6.74 percent at 3:21 p.m. New York time, according to Banco Santander SA.

Leos and his team are studying how Colombia’s drug war affected the South American nation’s economy to determine if they can see any parallels with Mexico.

“We are trying to see what the impact of violence on other countries has meant,” Leos said. “The impact in Colombia was as much as 2 percentage points off the economy at its worse point. This is a long-term issue though and we still don’t have enough information.”

Eight Mexicans were killed yesterday when armed men threw Molotov cocktails into a bar in the resort city of Cancun. The attack came hours after the federal Attorney General’s Office said police apprehended a suspected Texas-born drug trafficker, known as “La Barbie” for his blond hair and fair complexion. U.S. authorities say he smuggled thousands of kilograms of cocaine from across the border in Mexico.

Killings

In the past two weeks in the northern part of the country, two mayors have been assassinated, a car bomb exploded outside a television station, and 72 migrants were found massacred. A gubernatorial candidate was killed in June.

Mexico’s economy may grow 4.5 percent this year and 3 percent in the second half, Leos says. A slowdown in the U.S. economy will have more of an effect this year than the drug violence, he said. The economy contracted 6.5 percent last year.

S&P cited “diminishing” prospects for widening Mexico’s tax base in the second half of Calderon’s administration in a Dec. 14 note. The government adopted a 2010 budget that called for the biggest deficit in two decades.

To contact the reporters on this story: Andres R. Martinez in Mexico City at amartinez28@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net;

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