Drug war hits Mexican economy in crisis

By Robin Emmott - Analysis

MONTERREY, Mexico (Reuters) - Mexico's economy, already in recession, is being dragged even lower by a brutal drug war that is frightening off some investors and hurting the Mexican currency.

From manufacturing centers on the U.S. border to the southern beach resorts of Cancun and Acapulco, Mexicans have seen regular beheadings, shootouts and kidnappings as gangs fight over smuggling routes into the United States.

The turf wars killed 6,300 people last year and the U.S. government, fearing that the violence will spill over onto its soil, is boosting security along the border.

Some U.S. investors have pulled money out of Mexico worried that drug cartels are overwhelming security forces, and a recent study by the United States Joint Forces Command said Mexico could be at risk of a "rapid and sudden collapse."

"The issue of security has effected economic growth in Mexico," Finance Minister Agustin Carstens said recently.

"If we could resolve this issue it could give the economy an extra shine of at least 1 percent," he said.

Central bank Governor Guillermo Ortiz blamed the peso's fall to a 16-year low against the dollar last month on investor alarm even as the Mexican and U.S. governments and international economists insist Mexico is far from becoming a failed state.

"Evidently the insecurity has had an impact on investors' behavior," Ortiz told a recent banking conference.

Mexico's government says the economy will shrink 2.8 percent this year, tumbling into recession on a sharp drop in U.S. demand for Mexican exports. Many economists say the slump could be even more dramatic.

The turf war between Mexican drug cartels has become the biggest test facing President Felipe Calderon, a strong-willed conservative who took power in late 2006.

U.S. President Barack Obama will visit Mexico this month, and is sending high-tech gear and hundreds more agents to the border to fight the smuggling of drugs, weapons and cash.

In Mexico's border states, where violence has been the most intense, business people say that on top of a collapse in exports to the United States and falling domestic sales, some are forced to pay protection money to gangs.

"They demand that you pay into a bank account or they'll kill you," said a bar owner in the northern city of Monterrey who gave his name only as Emmanuel. "Aside from the fear, it's an economic blow, its like paying taxes twice."

Others say some foreign firms are putting off investments as they see Mexico as too unsafe.

"There are U.S. companies that have held back new product lines that were due to be installed in our assembly-for-export factories this year," said Jorge Pedroza, director of the maquiladora association in Ciudad Juarez.