Headwinds are Building Against Future Growth in Mexican Defense Spending

by Bill Ostrove, International Military Markets Analyst, Forecast International.

The fight against drug cartels and organized crime remains the primary driver of defense spending by Mexico. Since 2006, the nation’s military has worked closely with national and local police to combat trafficking networks and organized criminal groups.  As Mexico’s economy has improved and operations against drug cartels have continued, defense spending has steadily increased.

Between 2012 and 2016, Mexico’s defense budget increased at a compound annual growth rate (CAGR) of 5.2 percent.  Still, defense spending remains low as a percentage of the overall economy, making up only 0.55 percent of GDP in 2016. While defense spending increased in Mexico, it declined in dollar terms because of the declining value of the peso.  Mexican defense spending reached a high of $6.8 billion in 2014. However, it fell to $5.7 billion in 2016.

As part of the government’s effort to rein in defense spending, its 2017 draft budget calls for a 9.9 percent reduction in 2017. Under the plan, the Secretariat of National Defense (SEDENA), which controls the Army and Air Force, will receive MXN69.4 billion, while the Secretariat of the Navy (SEMAR) will receive MXN26.3 billion.

The largest portion of Mexico’s defense budget goes to personnel expenses, which account for 73.8 percent of defense spending in 2017.   The fight against criminal groups does not require investment in expensive power projection equipment, such as supersonic fighters and tanks. Instead, it requires well-trained and motivated troops to support police operations. For years, Mexico’s military suffered from low morale and high desertion rates. To reverse the situation, the average military salary was increased by 107 percent between 2006 and 2010. While personnel spending growth slowed in 2015, it has since rebounded, growing 2.1 percent in 2016 and 4 percent in 2017. However, operational and physical investments remain a small part of Mexico’s overall defense budget. Physical investments in particular decline drastically in 2017, from 13.8 percent of the budget to 8.2 percent.

Mexico’s defense spending growth will be uneven between 2018 and 2022. After years of steady growth, headwinds are building against future increases. The government is committed to reducing spending as part of a plan to rein in budget deficits. Defense budgets will not be left out of those decreases.

Furthermore, Mexico’s economy now faces more uncertainty than it has in the recent past because oil prices continue to be low and trade with the U.S. threatens to be disrupted by the election of President Donald Trump. Economic uncertainty will leave the government with less funding to spend on all government programs, including military programs.

On the other hand, the country continues to face threats from drug traffickers and organized crime, and the military will be forced to respond. For these reasons, Forecast International expects defense spending to increase between 2018 and 2022. Overall, defense spending will increase at an annualized rate of 1.6 percent. However, growth will be uneven. Defense spending will rebound in 2018, following significant declines in 2017. It will then hover at an even rate for a couple of years before starting to rebound again in 2021.

Please feel free to use this content with Forecast International and analyst attributions, along with a link to the article. Contact Ray Peterson at +1 (203) 426-0800 or via email at ray.peterson@forecast1.com for additional analysis.

The Forecast International International Military Markets series examines the military capabilities, equipment requirements, and force structures inventories of 140 countries, with corresponding coverage of the political and economic trends shaping the defense market outlook for individual countries and regions.Forecast FI Logo

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