NEWTOWN, Conn. - The fight against drug cartels and organized crime remain the primary driver of defense purchases for Mexico. As Mexico's economy improved and operations against drug cartels continued, defense spending has steadily increased. Between 2011 and 2015, Mexico's defense budget increased at a compound annual growth rate (CAGR) of 5.8 percent. Still, defense spending remains low as compared to the overall economy, making up only 0.54 percent of GDP in 2015.
When measured in dollars, defense spending declined in FY16. However, this is largely due to the rising value of the dollar compared to the peso. In terms of pesos, the FY16 Mexican budget will increase 1.4 percent to MXN99,651.9 million. The Sedena will receive MXN72,250.7 million, while the Navy will receive MXN27,401.2 million under the plan.
The largest portion of defense spending in Mexico goes to personnel expenses. In FY16, 68.2 percent of all budget expenditures will be allocated to personnel. This is partially because of the types of operations Mexico's military is involved in. It conducts internal operations against drug cartels. Therefore extremely expensive equipment, like multirole jet fighter aircraft, is not needed. In addition, aid from the U.S. - especially between FY12 and FY14 - has helped cover the cost of equipment purchases, freeing the Mexican government to pay for day-to-day expenses.
Between 2006 and 2010, the average military salary was increased by 107 percent in order to improve morale and reduce the growing rate of desertions.
However, cost growth of personnel expenses has slowed since that time. In FY15, personnel expenses only rose 0.1 percent. That figure was 2.1 percent in 2016. Investment expenses have increased the most in recent years, rising 66.8 percent in FY15 and 3.5 percent in FY16. Total investment climbed from 8.8 percent of combined Sedena and Semar expenses in FY14 to 13.8 percent in FY16. This is partially to make up for a drop in U.S. aid, which declined from $160 million in FY14 to an estimated $90.7 million in FY16. Increased investment expenses will also cover the cost of new equipment that Mexico is purchasing to improve its operational capabilities.
Because Mexico's armed forces are typically involved in operations against drug cartels and organized crime, most acquisitions focus on surveillance operations and improving mobility. Equipment designed to project power, like large naval ships and multirole fighters are not major procurement targets. Instead important acquisition goals include purchasing new EC-725 Cougar helicopters, C-295 transports, Polaris II and Tenotchtitlan coastal patrol vessels, DN-XI tactical vehicles, and 3-D surveillance radar systems.
Going forward, defense spending will increase steadily. Mexico's economy remains one of the most stable in Latin America, and government finances are also sound as the government reforms taxes and reduces reliance on volatile oil revenue. Mexico's government also remains popular with bond investors, due to its relative financial stability compared to other Latin American countries, such as Brazil and Venezuela. That makes it easier and cheaper for the government to borrow money for spending objectives.
Threats from cartels and the military's role in dealing with those groups will further drive defense spending. Mexico's continued economic growth will lie at least in part with security and stability within the country. In order to maintain the military as it fights various groups, the government will keep defense spending level relative to GDP.
Factors remain that could put downward pressure on defense spending going forward. Oil production remains an important part of Mexico's economy. With prices expected to remain low over the next few years, it could put pressure on the Mexican economy. In addition, the value of the peso is expected to continue to fluctuate moving forward. Therefore, while Mexico's defense budget will continue to increase, it will not increase at the same pace as it did between 2012 and 2016. Forecast International expects a CAGR of 4.2 percent between 2017 and 2021.
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