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Drug violence hurts Mexico services - BofA Merrill

by Reuters
Tuesday, 6 September 2011 19:24 GMT

MEXICO CITY, Sept 6 (Reuters) - Drug cartel violence in Mexico is dampening the services sector but not having much impact on agriculture and manufacturing, Bank of America Merrill Lynch said in a report on Tuesday.

About 42,000 people have died since President Felipe Calderon sent in the army to control drug gangs in late 2006, with the spiraling violence fanning concerns about the impact on investment and economic growth.

But the study showed there had been a measurable impact only on the services sector -- which makes up about two-thirds of the economy -- while the export-driven agricultural and industrial sectors continue to be driven by external demand, mostly from the United States.

"To the extent that insecurity has affected economic activity, it has done so in business directed more to the domestic market, and not in those associated with exports," wrote Bank of America Merrill Lynch economist Carlos Capistran.

The research also showed lower inflation rates in northern states, which have been hardest hit by the violence -- particularly for services such as movie tickets, where prices dropped sharply in the north-west.

About 80 percent of Mexico's exports are bound for the United States, where recent economic data shows a slowdown in growth. Economists have revised down their expectations for growth on the back of the weaker U.S. outlook, with the last central bank survey showing expectations for the economy to expand by less than 4 percent this year. For details see [ID:nN1E7800J1].

The report warned that continued incidents such as last month's brutal attack on a casino, killing 52 people, risk scaring away investors in the longer term.

"The economic impact of the rise in insecurity could eventually be more significant through delayed investment and consumption, if tragic events similar to those in Monterrey become more prevalent," Capistran wrote.

But the bank did not expect the federal government's fight against crime to have a major impact on asset portfolio investments or drive away global capital flows.

The report is based on a regression analysis of Mexican government state data. (Editing by James Dalgleish)

Our Standards: The Thomson Reuters Trust Principles.

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