Mexico Drug Violence Affecting Tourism

| Jan. 23, 2011 |

Published by Minyanville

Mexico’s drug wars lead the week’s financial news again as the city’s wealthiest city, Monterrey, was hit by a spate of 23 killings along with one woman dying of a heart attack upon witnessing a massacre in the city.

Home to some of Mexico—and the United States’ biggest companies, including Cemex (CX) and General Electric (GE), Monterrey’s income is double the national average. The state of Nuevo Leon, of which Monterrey is the capital, however, has seen at least 60 killings in 2011 alone.

The violence is not confined to drug cartels and that is what is worrying business leaders. A US company executive was abducted, beaten and robbed of his armored car earlier this year while both Fitch and Standard & Poor’s both downgraded the country’s credit rating at the end of 2009, citing drug violence.

Not-so Accidental Tourists: While cities such as Juárez and Tijuana on the northern border are used to the violence, Monterrey and Oaxaca—which saw the third Mexican mayor killed in just the first two weeks of 2011—are slowly becoming accustomed to it, pushing out business and tourism.

Evidence of this was news that three cruise lines,Royal Caribbean Cruises, Norwegian Cruise Lines and Carnival Corp, announced they would be ending or at least scaling back trips to Mexico from California. While none of their destinations have been affected by the drug violence, customers, they claim, aren't distinguishing between regions of Mexico and are put off the country as a whole by news of violence.

While international tourism may be dropping, there are signs that domestic tourism, or at least travel, is on the up, with the news that InterJet, a low-cost domestic carrier, signed a contract to buy 20 Sukhoi-SuperJet aeroplanes for $650m. The first deliveries are scheduled for the second half of 2012. Flights on the new planes are likely to cover Toluca to Aguascalientes, San Luis Potosi and Querétaro.

And Virgin America is looking at new routes to San Jose del Cabo, in Baja California, Mexico, as it ordered 60 Airbus SAS planes valued at $5.1 billion, more than doubling its fleet.

Border Wars: The US government last week cancelled plans for a “virtual fence” along stretches of the US-Mexico border, which had been in progress since 2006.

Boeing’s (BA) ambitious plans for the fence, known as SBInet, have cost about $1 billion already. The fence would have consisted of video cameras, radar, sensors, as well as other modern technology to capture immigrants and smugglers. It is thought that the spiraling cost of Boeing’s plans are to blame. The Department of Homeland Security said $1 billion was spent covering just 53 miles of border in Arizona. The Department’s new approach should cost less than $750m to cover some 323 miles. The news caused Boeing’s shares to rise 16 cents to $69.99.

Motoring On: The auto industry saw a boost with General Motors (GM) about to invest $540m in a Mexican engine plant to build more fuel-efficient engines. President Felipe Calderón was keen to demonstrate that this showed the world that "Mexico is a safe and productive place to invest.”

Mixed stock: In a mixed week for the stock market, the IPC index was down slightly to 37,585, though not too far from its recent record high and upward trend.

Shares in Carlos Slim’s Grupo Carso spin-off Frisco are continuing to rocket for their third consecutive week. They were up 10% to 55.99 pesos, 95% up from their initial public offering of 35 pesos on 6th January.

America Movil (AMX), Cemex and Walmart de Mexico (WMT) all saw shares up slightly this week, although volume on the market was very light, with just 6.8m shares traded on Monday at a value of $18m. This improved later in the week as volume on Thursday was back up near $490m.

Grupo Televisa (TV), Kimberly-Clark (KMB) and Mexichem all saw declines in share value.

Walmart rival Antad said early this week sales rose 3.5% in 2010 compared to the previous year. Total sales at the company’s 19,000 stores rose 9.3% in 2010 to $73.3 billion. The company intends to expand floor space by 8% as well as add 35,000 jobs in 2011. The figures are thought to be skewed slightly as comparisons are made with the 2009 recession.

Do as You're Told: Telecommunications company Telmex was told by regulators in Mexico to reduce its prices. Regulator Cofetel slammed the company, 49.1% of which is owned by Carlos Slim, and will determine final prices in April along with the Communications Ministry.

Shrinking Peso: The Mexican peso fell suddenly 0.4%, its largest fall in three weeks against the US dollar to 12.1241 early this week. Initial jobless claims in the US are thought to be to blame. Claims rose 35,000 to 445,000 in early January. The US economy is crucial to Mexico’s as 80% of Mexican exports head north across its border. The peso did, however, rebound towards the end of the week to 12.0675 to the dollar.

Crude Dips: Mexico’s crude-oil production is expected to dip to an average of 2.567 million barrels a day, according to the country’s Energy Ministry. The government, however, expects a 2012 rebound to be the end of a seven-year decline in production. Last year, the country produced an average of 2.578 million barrels a day.