Mexican spending on security and military equipment set to rise sharply through 2017

The critical issue preventing Mexico from realising the vast potential of its geographical location is security. Whether it is the energy sector or manufacturing and services, few foreign companies are willing to risk the safety of their employees in the country or see their goods stolen and ransomed at the hands of powerful drug cartels and organised crime syndicates.

Mexico’s economy and security are inextricably linked. Long term security can’t improve without a boost to the economy while the economy is held hostage to the security situation. How this will pan out isn’t clear, but one thing is certain: The current Institutional Revolutionary Party (PRI) government that has run Mexico for 71 years isn’t planning on handing over power to its rivals, the National Action Party (PAN), without a fight in the 2018 election.

As Mexico’s charismatic president, Enrique Peòa Nieto, enters his last three years in power, he has a clear task in front of him. If his Institutional Revolutionary Party is going to have any chance of winning the next presidential elections they are going to have to demonstrate remarkable improvement on two fronts: public security and the economy.

With oil prices down and the economy barely registering an anaemic 2% of GDP growth, the priority is to attract investment into the manufacturing and energy sectors. This is expected to come mainly from US, Canadian and European oil companies willing to invest in exploration now and betting on flows coming on-stream by 2018 when oil prices are forecast to be healthier.

As for manufacturing, Mexico hopes to present itself as an attractive manufacturing base for US companies increasingly put off by China’s tough new regulations targeting foreign companies and its poor protection of intellectual property. As a North American Free Trade Agreement (NAFTA) partner, Mexico is a good bet. According to a 2014 report by Boston Consulting Group (BCG), by 2012 the cost of labour in Mexico was no more than in China when Mexico’s higher manufacturing productivity was taken into account. By 2015, BCG expected Mexico to have a cost advantage of almost 30% over China.

President Nieto, therefore, has to look strong on security. He has taken a couple of knocks to his popularity recently; his strategy of playing down the security situation backfired in spectacular fashion in September 2014. He was seen as indifferent when local government officials in collusion with police and drug cartels brutally murdered 43 trainee teachers to widespread national outrage that even dominated the headlines internationally. Later on, there was the whiff of scandal when it emerged the president had had suspicious dealings with a Mexican construction giant, the recipient of several large government contracts, which had allegedly arranged a generous mortgage for the president’s wife on a luxury mansion in Mexico City.

To rescue his fortunes and that of the PRI, president Nieto has no option but to spend his way to re-election. With money markets flush with cash earning paltry interest rates, and Mexico’s better-than-expected credit rating, the country is seen as a healthy investment opportunity that president Nieto is likely to tap into heavily. He has already shown a willingness to do just that. Defence spending increased 72.5% from $4bn in 2006 to $6.9bn in 2014 and is projected to be $11.6bn by 2019. Money is going into aircraft – including manned and unmanned surveillance aircraft, and helicopters for special operations – naval vessels, land and maritime border security and its C2 infrastructure as well as into the development of a national intelligence system.

The roll-out of Safe City projects across the country are also likely to accelerate. These are modelled on the one recently implemented in Mexico City, which has shown impressive results in reducing crime and improving response times and arrests.

The outcome of Nieto’s efforts are not yet clear; they certainly have not been decisive enough to win an election on the back of just yet. But after a number of false starts over the years the current PRI government is committed to a programme of radical reform and its record on implementation so far is impressive, even if the benefits have yet to trickle down to ordinary Mexicans. One other thing Mexico has going for itself that no other country in Latin America does is its economic integration with the United States. That may count for a lot in the coming years.

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