Mexico Boom Biggest in Americas as Drug Criminals Lose to Nafta

For all of the killings of elected officials at war with the criminal drug gangs, there is no stopping the Mexican investment boom thanks to the 16-year-old trade agreement that is buoying Latin America’s second-largest economy.

Mexico’s stocks, bonds and currency are beating the U.S. and Brazil for the first time since 2002, data compiled by Bloomberg show. Dollar debt issued by Mexico is returning 16 percent in 2010, more than the 14 percent for Brazil bonds and 8.8 percent for U.S. Treasuries, according to JPMorgan Chase & Co. and Bank of America Corp.

The IPC stock index is up 5.3 percent, compared with a 2.8 percent advance for the Standard & Poor’s 500 and 2.4 percent gain for the Bovespa. The peso rallied 4.5 percent against the dollar this year, surpassing the Brazilian real’s 3.2 percent increase.

“The reality is that you will continue to see companies making long-term investments,” said Guillermo Osses, who helps oversee $50 billion in emerging-market assets at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest bond fund manager. “We still have significant exposure in Mexico.”

The North American Free Trade Agreement that took effect in 1994 continues to lure investors even as Mexico confronts its worst-ever drug violence. The treaty signed with the U.S. and Canada caused overseas sales to quadruple. In the first seven months of this year, Mexico’s share of U.S. exports rose while China’s fell, according to the U.S. Commerce Department. Gross domestic product expanded 7.6 percent in the second quarter, the most since 1998, boosted by U.S. demand for everything from refrigerators to cars.

Growing Partnership

“Since 1995, the advantage that Mexico has as a partner with the U.S. in Nafta has been growing,” said Sergio Luna, the head economist at Citigroup Inc.’s Banamex unit in Mexico City.

Investors poured $2 billion into Mexican equities in the 12 months to July, reversing a $470 million net withdrawal in the year-earlier period, according to EPFR Global, a research firm in Cambridge, Massachusetts.

The IPC index will climb 6.5 percent in the next year, compared with 15 percent for the Bovespa, according to Bank of America forecasts on Sept. 16. The S&P 500 will gain 4.3 percent by the end of this year, according to the average estimate of 11 strategists surveyed by Bloomberg.

The violence is negative “from a human perspective,” said Pimco’s Osses. “But from an investor perspective it’s not that big of a problem.”

‘Tragic Dimensions’

Yields on Mexico’s benchmark 10 percent bonds due in 2024 dropped to an all-time low 6.36 percent on Aug. 20, following a record three-month-long decline in consumer prices through June.

The peso is forecast to climb 2.3 percent by the end of next year, compared with a 0.6 percent drop for the real, according to the median estimate of analysts surveyed by Bloomberg.

The peso fell 0.6 percent versus the dollar by 1:25 p.m. today in New York, while yields on Mexico’s 10 percent bond due in 2024 fell four basis points, or 0.04 percentage point, to 6.46 percent. The IPC index of stocks gained for a third day, rising 0.2 percent.

“Drug-related violence in Mexico has increased, and even spilled over to areas in the country previously thought to be immune,” said Stefan Hofer, an emerging-markets equity strategist at Bank Julius Baer & Co. in Zurich, which oversees about $160 billion worldwide. “While the security situation is an important issue to watch, and has many tragic dimensions, international investors have not been dissuaded from investing in Mexico.”

Eleven Mexican mayors have been killed since the start of the year, adding to gang violence that killed more than 28,000 people since President Felipe Calderon took office in 2006.

Mass Murder

Gunmen kidnapped Edelmiro Cavazos, the mayor of Santiago in Nuevo Leon state, on Aug. 15. He was found bound and shot on the side of a mountain road on Aug. 18. Marco Antonio Leal, the mayor of Hidalgo in the border state of Tamaulipas, was assassinated while driving on Aug. 29. Alexander Lopez, mayor of El Naranjo in San Luis Potosi state, was shot as he sat at his desk on Sept. 8.

Gustavo Sanchez, the interim mayor of Tancitaro in Michoacan state, was found on a country road on Sept. 27. His corpse showed signs that he had been stoned to death, state officials said.

Seventy-two murdered migrants were discovered at a ranch in Tamaulipas on Aug. 25. Two days later in the same state, a car bomb exploded outside the offices of Grupo Televisa SA, the world’s largest Spanish-language broadcaster.

Mexico’s push to draw tourists, the country’s third-biggest source of dollar inflows after oil and remittances, is getting more difficult as the violence persists. Eight Mexicans were killed in an attack on Aug. 31 at a bar in the resort city of Cancun.

College-Age Tourists

Hotels in Acapulco and Cancun had a smaller-than-normal influx of college-age customers in March, according to tour operators. The number of spring breakers handled by travel service StudentCity dropped 45 percent from last year in Acapulco and 30 percent in Cancun, Christina Ferraro, an event organizer for the company, said in March.

Mexico’s international tourism revenue fell 15 percent last year, the first decline in a decade, as swine flu drove down spending by travelers to $11.3 billion. While spending by visitors rose 6.8 percent in the first six months of the year to $6.5 billion from the same period in 2009, the amount is still down 11 percent from the first six months of 2008.

“If tourism is affected, it’s not so much from the drug violence but from issues here in the U.S., such as the economic crisis,” said Francisco Alzuru, who helps manage about $200 million in emerging-market assets at Hansberger Global Investors in Fort Lauderdale, Florida. “The impact of the swine flu was a major one.”

Biggest Threat

Fifty-seven percent of business executives say the drug war is the biggest threat to the economy in Mexico, Latin America’s second-largest after Brazil, according to a July survey published by Deloitte Touche Tohmatsu, up from 49 percent in March and 22 percent in December 2009. Finance Minister Ernesto Cordero said Sept. 1 that violence from organized crime is shaving 1.2 percentage points off economic output a year.

“The federal government reiterates that it will continue working for the security of its citizens with all the state resources at its reach,” Calderon said in an e-mailed statement on Sept. 8.

Expanding Economy

The International Monetary Fund forecasts Mexico’s economy will expand 4.5 percent this year after shrinking 6.5 percent in 2009, the biggest rebound among the world’s largest nations after Russia. Sales at retailers in the U.S., Mexico’s largest trading partner, climbed in August for a second consecutive month, allaying concern the world’s largest economy will stumble in the second half.

Mexican production of cars and light trucks rose 53 percent in August from the same month a year earlier, the nation’s Automobile Industry Association said on Sept. 8 in a statement distributed in Mexico City. Exports increased 58.1 percent from a year ago to 175,904 cars and light trucks.

Mexico’s exports to the U.S. gained market share from China during the global financial crisis as companies benefited from lower shipping costs from a border country, said Luis De la Calle, a former Mexican negotiator for Nafta.

‘Competitive Destination’

“Mexico is perceived as good diversification of risk versus China,” said De la Calle, who is now a partner at Mexico City-based business adviser De la Calle Madrazo Mancera SA. “Mexico is a competitive destination for manufacturers and corporations.”

In the first seven months of the year, Mexico’s share of U.S. exports rose to 12 percent from 11 percent a year earlier. China’s share fell to 18.1 percent from 18.7 percent, according to the U.S. Commerce Department.

Companies from Tlalnepantla-based Mexichem SAB, Latin America’s largest plastic pipemaker, to Grupo Carso SAB, the holding company controlled by billionaire Carlos Slim, helped lead gains in Mexico’s benchmark stock index this year. The IPC index trades for 15.8 times analysts’ estimates for 2010 earnings, more than the 13.4 times for the Bovespa and a 13.7 price-to-earnings ratio for the S&P 500.

The violence hasn’t kept Volkswagen AG, Europe’s largest carmaker, and Purchase, New York-based PepsiCo Inc., the world’s largest snack-food maker, from investing in Mexico.

Volkswagen plans to start construction this year on a plant in Silao, Mexico, that will have a capacity to produce 330,000 engines annually. The project will create about 700 jobs in the city “over the medium term,” the Wolfsburg, Germany-based company said in a Sept. 22 statement.

“The Nafta agreement helped Mexico and provided support,” Pimco’s Osses said. “The influence that the drug violence has on business isn’t that significant at this point. Volkswagen decided that it’s not going to prevent them from investing in Mexico.”

Pepsi’s local unit took out a full page ad in the Monterrey-based El Norte newspaper on Sept. 30, pledging $20 million for a food research center in the region and promising to maintain its presence in the country’s north.

“We’re proud of our roots with 81 years in Monterrey,” the ad said. “We’re here today, and we’ll be here tomorrow.”

To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net; Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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