Eurosatory 2016

REGIONAL FOCUS - South America [ES2016D2]

14 June 2016

Latin America is presently relatively free of interstate hostilities, and one of its longest simmering insurgencies appears to have ended as the Colombian government and FARC (Revolutionary Armed Forces of Colombia) rebels reached an agreement on 23 September 2015 that could end their bloody, decades-long conflict.

Colombian president Juan Manuel Santos and FARC leader Rodrigo Londoño, also known as Timochenko, announced an agreement had been reached on ‘transitional justice’: the most difficult part of six-point negotiations ongoing since October 2012. Now comes a particularly difficult period of social reintegration and administration of that transitional justice. Still, the deal will provide relief for the highly experienced Colombian military, which plans to focus next on local criminal networks and international engagements such as peacekeeping.

MEXICOMEXICOThe Mexican Navy worked to sharpen its skills with its first amphibious landing exercise alongside US, Japanese and New Zealand forces in early September 2015. It marked the first time the Mexicans had fully participated in this type of multinational training exercise and signals an effort to shift Mexico’s foreign policy towards participating in international military operations.

Although it has been hampered by serious economic issues, Brazil has continued to advance military modernisation efforts, albeit at a slower pace. The Brazilian Navy is still considering buying two aircraft carriers, displacing about 50,000 tons each, as part of its PRONAE (Programa de Obtenção de Navios- Aeródromos) programme, and in December 2015 announced the procurement of FS Siroco (L 9012): a dock landing platform from the French Navy.

This ship will considerably increase the service’s ability to conduct a variety of missions, including troop and material transport and disaster relief.

Moreover, Saab announced in September 2015 that its October 2014 contract with the Brazilian government for 36 Gripen NG multirole combat aircraft had gone into effect. Deliveries of the aircraft – 28 single-seaters and eight twin-seaters to fulfil Brazil’s F-X2 requirement – will run from 2019 to 2024.

Elsewhere, Venezuela has continued to receive a range of equipment – mainly Chinese and Russian – to bolster its defences and regional force projection capability. The Venezuelan armed forces have also been increasing their media visibility and have engaged in extensive sabre-rattling with neighbouring Guyana and at times with Colombia. Such efforts are likely meant as a distraction from Venezuela’s crippling economic problems.

In Nicaragua, President Daniel Ortega has announced that the country’s navy may expand and upgrade to more effectively patrol its sovereign waters, conduct search-and-rescue missions and protect fishing rights.

The Peruvian National Congress, meanwhile, approved the Airspace Surveillance and Control Law in August 2015, re-authorising the country’s air force to shoot down aircraft suspected of transporting arms or drugs (a previous law was suspended in 2001 after the Peruvian Air Force accidentally shot down a Cessna carrying American missionaries). The new law authorises the air force to shoot down aircraft that fail to comply with instructions to land if they are suspected of carrying drugs, weapons or biological agents.

Bolivia passed a similar law in 2014, and on 9 November 2015 officially signed a deal with France’s Thales for an integrated air defence and civil air traffic management system. The system would be a significant upgrade for Bolivia, which does not have primary radar coverage for its airspace.

Notably, the US Department of State removed Cuba from its list of state sponsors of terrorism in May (leaving only Iran, Sudan, and Syria on that list). The two rivals are working to restore full diplomatic relations and eventually, if trade embargoes are lifted, this could open the Cuban military to some modernisation programmes.

REGIONAL LAND VEHICLE FORECASTS (2016-2024)

End user countries Brazil’s five-year compound annual growth rate (CAGR) of 26.26% shows tremendous growth, with a healthy market value of USD5.27 billion representing 6.3% of the region’s buyers over the forecast. Its most significant programme, the Guarani APC, is forecast to be approximately USD2.1 billion. It also will continue M113 upgrades and procure the Astros 2020 self-propelled artillery (SPA) system for approximately USD158.7 million. USD2.3 billion in stated opportunities are forecast, including reconnaissance vehicles; VBR-MR/LR for USD2.1 billion and USD74.6 million for the Viatura Blindada Multitarefa- Leve de Rodas (VBMT-LR). Three opportunities for SPA are forecast to be USD101.8 million.

Currently forecasted are USD49 million in derived opportunities for logistics support vehicles. Mexico, with a five-year CAGR of -19.17% and a market value of USD1.64 billion, has a much smaller market share (approximately 2%), but has a healthy HMMWV programme with 3,335 vehicles ordered for USD504 million, as well as its ERC 90 Lynx upgrade of 119 vehicles valued at USD26.3 million. Additionally, Mexico has a stated opportunity for an armoured reconnaissance vehicle for USD106 million. Mexico has USD499 million in derived opportunities highlighted by an APC and amphibious APC, forecast at approximately USD200 million each.

Venezuela’s five-year CAGR of -17.68% and market value of USD1.05 billion, are dominated by its VN1 8x8 programme at USD141.9 million, followed by its ZBD-05 amphibious vehicle programme (USD82.5 million) and BMP-3 at USD78.5 million.

Derived opportunities exist with approximately USD100.7 million forecast, including an MRAP (for internal security duties), an upgrade to in-service BMP-3s and a new light utility vehicle.

MAJOR DEFENCE MARKETS

Brazil

BRAZILBRAZILBrazil has the largest armed forces, the largest defence budget and the most advanced military manufacturing industry in Latin America. However, the legacy of its military dictatorship (1964- 85) means that civilian distrust of the armed forces began to recede only recently, allowing the country to begin a process of restructuring and modernisation to meet new challenges.

With Brazil having played no significant military role in the two world wars (although it sent an expeditionary force to Italy in 1944) and having suffered no invasion of its territory since a war with Paraguay in the 19th century, defence spending was traditionally a low government priority. This tendency was reinforced following the end of military rule in 1985, with subsequent civilian governments deliberately limiting the power of the armed forces and attempting to bring the military under civilian control.

A combination of growing national wealth in the 2000s, the need to protect newly discovered natural resources and the desire to reinforce its status as a rising regional power have driven Brazil to increase its defence expenditure. Consecutive national defence strategies in 2008 and 2012 emphasised Brazil’s commitment to building an indigenous defence industry capable of supplying its growing military requirements. In 2012, Brazil published a USD300 billion, 20-year equipment plan, which outlined the aspirations of its military forces until the 2030s and in some cases, such as submarine capability, beyond.

A long list of procurement requirements and a desire to benefit from foreign technology have made Brazil an important market for international suppliers. Since 2010, the country has signed significant strategic defence accords with states such as France, India, Italy, the UK and the US, and has shown a determination to gain the maximum value from foreign procurement through extensive offset and industrial participation.

However, Brazil’s emergence as a significant importer of defence materiel has been reliant on its economic performance and since 2010 this has weakened markedly. 2014 saw real expansion of Brazil’s economy of just 0.14%, and and in 2015, a real terms contraction of 4% occurred. This has resulted in a slowdown in the growth of the country’s defence budget, with real contractions in 2011 and 2013, with a further decrease in expenditure in 2015 expected to be more severe in 2016.

Real growth is not expected to return to the Brazilian defence market until 2020, when changes in economic policies and more favourable regional economic conditions are expected to have eased the pressure on state expenditure. Defence spending allocations will have fallen over this period from 1.4% of GDP in 2015 to 1.2% in 2020.

Defence spending

Although 2015’s defence budget of BRL81.6 billion (USD30.7 billion), up from BRL78.7 billion (USD29.6 billion) in the 2015 draft state budget, contained an increase in procurement funding from 10% to 12% of the total, it did not reverse a downward trend in equipment purchases from the 2012 peak. The 2016 budget law mandates further cuts to the materiel budget, which would make up just 7.1% of total expenditure – the lowest proportion since 2007.

A previously stated intention of increasing defence spending to 1.8% of GDP, now unlikely to be met for decades, would have required the Brazilian budget to rise to USD39.4 billion in 2015.

Despite an expectation of two consecutive years of negative GDP growth, the country’s defence expenditure is forecast to fall as a percentage of GDP in the five years to 2020, reaching a low of 1.15% in this period.

The Brazilian Navy and Air Force’s ambitious 2030 requirements, which currently aim to have a second naval fleet comprising another aircraft carrier, frigate escorts, submarines and possibly a fifth-generation fighter fleet for the air force, are likely to be revised given this shortfall in projected spending. Economic realities, uncertain political commitment and pressure to direct increasingly limited public funding towards social projects, such as poverty reduction, will further limit future procurement.

Brazilian defence expenditure is therefore forecast to fall significantly in real terms until 2020. By this time, global commodity prices are expected to have risen once again, providing stimulus to Latin America’s extractive economies and in turn the region in general.

President Dilma Rousseff’s change in economic strategy following her re-election in late 2014 may eventually begin to yield improvements in the economy, reducing constraints on state expenditure. A further boost to spending on Brazil’s armed forces could follow the end of the 2016 Olympic Games, which are consuming significant state funds in general, but have also required investment in largely non-military security infrastructure.

Land sector indigenous industry

Brazil’s land forces are almost entirely equipped with foreign-made vehicles and systems. Accordingly, Brazil lacks the indigenous capability to produce – and to a degree maintain or upgrade – armoured vehicles.

Efforts have been notable to close this capability gap, for example through attempts to maximise indigenous involvement in the Guarani wheeled armoured vehicles programme.

Brazil is well served in armaments production, with several indigenous firms manufacturing a wide range of small arms, artillery systems and large and small calibre munitions. Brazilian firms are also adept at developing subsystems for land platforms.

Imbel’s contribution of battle management systems for the Guarani armoured fighting vehicle programme is a notable example.

Venezuela

VENEZUELAVENEZUELAVenezuela, despite spending the fifth-largest defence budget of South America in 2016, is close to economic collapse. The quasi-socialist economic model instituted by the late president Hugo Chávez is failing to provide basic goods such as food and medicine to the population. Price inflation in 2015 reached 88.2% and fears of debt default began to rise.

With Venezuelan procurement long having been forced away from suppliers in the US and Europe by the embargo instituted by the former in 2006, its strong state-level relationships with countries such as China and Russia – which have been willing to enter into unconventional financing arrangements – will mean that military purchases are unlikely to be totally abandoned.

With fears over social unrest reinforcing the authoritarian regime’s desire to maintain the armed forces’ loyalty and with a valuable resource in the form of oil still abundant, President Nicolás Maduro may continue to attempt to maintain current levels of military investment.

Venezuela’s economy is highly dependent on oil revenues, which have largely been spent rather than retained as strategic or contingency reserves as in the case of other oil exporters. The sustainability of this strategy after 2014 and 2015’s large falls in oil prices, alongside rising government debt, has been shown to be short-lived.

With much of the country’s defence budget already financed by debt, spending trends have been strongly affected by the success or otherwise of Venezuela’s oil industry. The likelihood is that as well as being closed to many US and European companies, Venezuela’s defence market will be forced into a period of reduced investment until the country’s macroeconomic problems are at least less immediate, if not entirely resolved.

Rising societal pressure to tackle Venezuela’s fundamental economic issues now seems likely to result in further political instability, as opposition parties, which now hold a majority in the country’s National Assembly, attempt to remove Maduro from office.

Defence spending

Before its economy was crippled by the extreme rates of inflation of 2013-16, Venezuela’s defence expenditure was the third largest in South America, although Argentina and Chile’s were close behind. Taking inflation in those years into account, however, gives Venezuela’s 2016 budget a value of just USD2.3 billion; closer to Peru’s much lower level of spending than Chile’s.

A fall in the nominal defence budget in 2015, coupled with this extremely high rate of inflation, saw the amount of funds available for enhancement of the capabilities of the Venezuelan armed forces fall dramatically.

Defence expenditure as a proportion of GDP, which peaked at 1.4% in 2013, plunged to just 0.5% in 2015, as Venezuelan spending in US dollars is expected to have lost almost 70% of its 2013 value. Despite an increase in defence spending of 158% in 2016, real spending rose only slightly to USD2.3 billion.

As a result of procurement being disproportionately affected by declining availability of funding in the five years from 2014, it is expected to fall to fall even further, with USD363 million expected to be spent on materiel in 2019.

Some resilience in spending is expected, however, due partly to Chinese and Russian geopolitical concerns leading to a greater degree of flexibility in contract terms than might otherwise be expected.

Procurement overview

Two main factors drive Venezuelan procurement spending under Maduro: the continuation of a military modernisation drive initiated by the late President Chávez (and many other leaders in the region) and a desire to maintain military capabilities and allegiance in the event that they are required to as a guarantor of regime stability.

Recent major activity has mainly been through deals with Russia, notably an extensive 2009 contract worth USD2.2 billion to provide a large number of new platforms, including:

  • 92 T-72 main battle tanks (MBTs);
  • 123 BMP-3 infantry fighting vehicles;
  • 114 BTR-80 8×8 armoured personnel carriers;
  • 200 Igla-S man-portable air defence missile system;
  • 300 ZU-23-2 23mm twin antiaircraft guns;
  • 24 BM-21 122mm multiple rocket launchers;
  • 48 120mm Sanyi self-propelled mortars;
  • 48 MSTA-S (2S19M1) 152mm self-propelled howitzers.

These deliveries were followed in 2013 by five S-300VM strategic air defence systems, 12 Buk- M2E self-propelled air defence systems and 12 Smerch 300mm multiple rocket launchers.

Defence co-operation between Russia, and increasingly China, is expected to continue, based on favourable financing arrangements and possibly countertrade agreements.

However, severe budgetary pressure from poor economic performance, inflation and the resultant need to increase armed forces wages will lead to a much lower likelihood of such large platform purchases until at least 2020.

Information from IHS Jane’s Markets Forecast, Defence Budgets and Navigating the Emerging Markets



(2476 words)
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