Eurosatory 2018

REGIONAL FOCUS: Latin America [ES18D1]

11 June 2018
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Latin America has remained relatively free of interstate hostilities of late, with Colombia’s decades-long conflict with the Revolutionary Armed Forces of Colombia (FARC) rebels concluding peacefully.

In November 2016, the Colombian House of Representatives and Senate eventually voted in favour of the FARC peace agreement (although the deal’s opponents abstained from voting). That accord, signed by Colombian president Juan Manuel Santos and FARC leader Rodrigo Londoño, was negotiated in a few weeks following a 2 October 2016 popular vote against a previous version of the FARC peace agreement that took years to finalise. FARC members have since checked in at UN-monitored gathering points and turned in thousands of individual firearms. The disarmament and re-integration processes are continuing.

On 4 September 2017, Santos said his government had also signed a ceasefire deal with National Liberation Army guerrilla leaders, which could potentially lead to a wider peace agreement.

Meanwhile, the Colombian defence industry is advancing and the state-owned Science and Technology Corp for the Development of Naval, Maritime, and Riverine Industries continued booking foreign sales in 2017.

There has been particular interest in its Short Range Logistic Support Ship.

Venezuela’s economic and humanitarian crisis has continued to worsen, threatening potential instability in South America’s north and particularly along Colombia’s eastern border.

Brazil has slowed some modernisation efforts due to continued economic troubles, but has still been one of the more active militaries in the region.

Meanwhile, Chile is considering buying additional second-hand Type 23 frigates from the UK and is studying options for upgrading its fleet of 46 F-16 fighters to keep the aircraft up-to-date through to the 2030s.

Argentina’s armed forces began to atrophy after the end of the military-ruled government in 1983. High losses during the Falklands War were never addressed – partly driven by politicians’ distrust of the military.

When president Mauricio Macri took office, many expected he would boost the military budget and invest in modernisation, but Argentina’s financial situation and competing priorities appear to still constrict military resources.

Unfortunately, this may have manifested itself in the loss of TR 1700-class submarine ARA San Juan, which disappeared with 44 crew on 15 November while en route back to its base at Mar del Plata.

On the brighter side, Macri signed a decree in July 2017 authorising state credit to finance some of the major defence acquisition programmes included in the 2017 budget. It authorised public credit for projects to buy offshore patrol vessels for the navy; Beechcraft T-6C+ Texan II aircraft, PT6A-68 engines and support along with medium transport aircraft for the air force; and 9x19mm pistols and assault rifles for all the armed forces.

COUNTRY OVERVIEWS

Brazil

Market overview

Brazil 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 only recently began to recede, allowing the country to begin a process of restructuring and modernisation to meet new challenges.

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 0.10%, and in 2015 and 2016 contractions of 3.85% and 3.16% were recorded. This resulted in a sharp contraction of the country’s defence budget in 2016, leaving 2014 and 2015 the only years of real growth since 2010. Despite continued austerity, proposed spending in 2017 is 8.87% higher in real terms than 2016, taking the budget back above 2011 levels in real terms. Although this rate of growth is not expected to be sustained, 2010’s historic peak in real spending is forecast to be exceeded by 2020.

In May 2016 the country’s long-running political crisis escalated further as impeachment proceedings against president Dilma Rousseff were initiated by the Brazilian Senate. During the process, Rousseff, who called the impeachment a ‘coup’, was suspended from office for 180 days.

In September 2016 the impeachment process was concluded with a vote that saw 61 senators back the removal of Rousseff, with just 20 offering her their support. Former vice-president Michel Temer, who had assumed the role of acting president on 12 May, will now serve the remainder of his predecessor’s term, heading a new coalition between his Brazilian Democratic Movement Party (Partido do Movimento Democrático Brasileiro: PMDB) and the Brazilian Social Democracy Party (Partido da Social Democracia Brasileira: PSDB).

Politicised procurement The procurement process in Brazil has shown evidence of politicisation. In September 2009 then president Luiz Inácio Lula da Silva publicly declared that France’s Dassault Rafale F3 was the favoured platform to meet the national F-X2 fighter requirement. This was later awarded to Saab, with an order for 36 Gripen E/F (F-39), to be delivered between 2019 and 2024.

Need for procurement reform

Brazil’s modernisation is unlikely to be wholly successful without an overhaul of procurement processes and the Ministry of Defence itself. Procurement is currently led by the three services rather than through the strong control of a central body (efforts to centralise procurement to a greater degree have yet to gain traction). The allocation of Brazil’s budget also presents a barrier to the country’s procurement ambitions. In 2016, 75% of Brazil’s defence budget was taken up by personnel and social expenditure, the highest proportional allocation in the region, severely limiting funds available for procurement and operational expenditure.

Promotion of domestic suppliers

Brazil has taken a series of steps in recent years to advance its national defence industries. These measures have included a favourable tax system (Law 12.598 of 2012 provides tax breaks to majority Brazilian-owned entities) and procurement regimes that allow authorities either to favour indigenous solutions or to extract maximum industrial benefits. Foreign solutions with no local involvement are, therefore, at a significant disadvantage when competing against comparable indigenous solutions.

Delayed procurement Major procurement programmes have not always proceeded smoothly. Modernisation and procurement programmes across the services have faced delays, restarts and postponements.

Brazil’s market is strong in APC and SPA segments and is funding logistics vehicles as well. Its mix of new vehicles and modifications is a positive sign in the region. It also procures ground vehicles from foreign suppliers, although it is capable of indigenous production.

Stated opportunities for Brazil in the air defence segment represent USD342 million and in the tank segment USD81 million.

An additional USD284 million for additional air defence systems, medium trucks and additional APCs is also forecast.

LAND VEHICLES MARKET FORECAST ( 2017 -2026)

Major suppliers

• Fiat Group (USD1.4 billion): down approximately USD700 million from the previous forecast, most significant is the Guarani VBTP-MR 4x4 and 6x6, and Light Multirole Vehicle (LMV).
• BAE Systems (USD421 million): up USD68 million over previous forecast. BAE has a solid position in Brazil with upgrades to the Brazilian M113s, AAVs and M109A5+ vehicles.
• KNDS (USD317 million): work on the Leopard 1A4 and 1A5 as well as CAESAR SPA vehicles drives the business for KNDS. Major programmes
• VBTP-MR Guarani (USD1.3 billion): production of the Guarani has been stretched out by four years but is still progressing.
• CAESAR (USD259 million): driven by continued modification procurement to the Stryker family.
• M113A2 (USD177 million): BAE’s M113A2 upgrade programme continues through 2021 and is forecast to be USD176 million.

Chile

Market overview

Chile is a regional economic leader; a stable and increasingly prosperous democracy with a well-educated population, a robust economy and low levels of corruption and crime.

Economically, the country performed strongly during and after its years of military rule and it remains one of the safest investment climates in the hemisphere (particularly since joining the Organisation for Economic Co-operation and Development (OECD) in January 2010). However, Chile’s real GDP growth has slowed since 2014 thanks to the falling prices fetched by its main export, copper. Chile’s economy expanded by 1.56% in 2016, down from 5.7% in 2010. Although growth rates are expected to improve from 2017, they will remain below pre-2014 rates for several years.

Chile faces few serious external security risks with its longstanding border disputes with its northern neighbours Peru and Bolivia. Although the dispute with Peru over the countries’ maritime border was resolved through an International Court of Justice (ICJ) ruling in early 2014, which saw Chile cede 20,000km of ocean territory to Peru, the ICJ ruled in September 2015 that it would hear Bolivia’s case that its territory should include coastal land taken by Chile in a 1904 peace treaty. In December 2015, meanwhile, Peru’s creation of an administrative district that included territory claimed by Chile prompted tension over the countries’ land border to resurface.

However, Chile also suffers from a degree of internal social unrest resulting from indigenous Mapuche militants and the country’s strong tradition of public protest.

Public protest persists despite Chile’s developing economy and regardless of the political orientation of the administration in power. According to Jane’s Defence Budgets, Chile’s defence spending allocation totalled USD4.53 billion in 2017, around 1.79% of GDP.

Chile’s military is well organised and well equipped.

Should proposals to change the way military equipment procurement is funded (see section: Defence spending overview and outlook), it would introduce a welcome degree of transparency and stability to the country’s acquisition process. The army has been the beneficiary of a substantial modernisation programme, which is nearing completion, although significant requirements in the Air Force and Navy remain unfulfilled.

Chile’s defence industry is well developed and clustered around the three state-owned defence companies: Factories and Arsenals of the Army (Fábricas y Maestranzas del Ejército de Chile: FAMAE); National Aeronautics Company (Empresa Nacional de Aeronáutica de Chile: ENAER); and Shipyards and Arsenals of the Navy (Astilleros y Maestranzas de la Armada de Chile: ASMAR). A number of smaller private-sector companies also provide defence products and services.

Copper

Military procurement in Chile remains reliant on the output of copper (see section: Defence spending overview and outlook). Although there is a political desire within elements of the Chilean government to move away from a military procurement model that is solely reliant on the revenue from copper exports, it remains a key enabler of military procurement spending, as well as of economic growth.

Chile is by far the largest producer of copper in the world, accounting for more than one-third of total output. The sustained reduction in copper prices witnessed since the end of 2010 has exerted a strong downward pressure on Chile’s procurement spending. In January 2014, former president Michelle Bachelet announced plans to reform defence financing with the passing of reforms to the Copper Law and the implementation of quadrennial defence planning.

Government control of defence industry Although Chile has a remarkably open policy on foreign investment and puts up no formal barriers to FDI in defence and security, the three major suppliers in the country’s domestic defence industry remain state-owned and controlled through the ministry of defence. Despite recent moves to increase transparency, the finances of the state owned industries remain opaque, as do lines of accountability and responsibility.

Civilian/military relations Chile’s military was relatively recently brought under increased civilian control. In late 2005, Congress approved constitutional reforms abolishing the positions of designated senators (often proposed by the military) and senators-for-life, and restored the presidential power to remove the heads of the armed forces. However, the transition has not always been smooth and there is debate within Chile that defence spending is too high given the lack of threats facing the country.

LAND VEHICLES MARKET FORECAST ( 2017- 2026 )

Major suppliers

• KNDS (USD75.4 million): KNDS is providing services to Chile’s Leopard 1 and 2A4 fleets.
• General Dynamics (USD20.5 million): General Dynamics provides services to the Stryker fleets in Chile.
• Famae (USD59.3 million): providing the NASAMS 2 Air Defence system, completed deliveries in 2017.

Major programmes

• Leopard 2A4 Upgrade (USD494 million): Chile plans to take its Leopard 2A4 MBT fleet through a midlife upgrade programme. Its Marder fleet is in need of replacement or upgrade, with 220 vehicles in service.
• NASAMS 2 (USD59.3 million): the Chilean Air Force acquired two batteries of the NASAMS 2 surface-to-air missiles with deliveries completed in 2017.
• Truck procurement (USD61.5 million): Chile is planning to procure an estimated 750 trucks, from light to heavy, from 2018 to 2022.

Venezuela

Market overview

Venezuela, whose defence budget was until recently one of the largest in South America, is now close to economic collapse. The quasi-socialist economic model instituted by the late-president Hugo Chávez has failed to provide adequate supplies of basic goods such as food and medicine to the population since its economic crisis began in 2015.

The military, which exercises direct influence over important sectors of the economy, is likely to support president Nicolás Maduro amid severe food shortages unless protests and unabated looting nationwide escalate beyond the capacity of security forces to contain them. Security forces are capable of containing protests before these become widespread and discontented Venezuelans are opting to migrate.

The opposition is divided, demoralised and demobilised following strong repression and claims of electoral fraud in the 20 May presidential election in which Maduro was re-elected until 2025. Price and foreign-exchange controls already impede the operating environment and a potential new constitution in the two-year outlook poses further regulatory, expropriation and tax risks for businesses. Murder, theft, extortion and kidnapping risks are extremely high by global standards and continue to rise.

External relations

On 24 August 2017, the US, Venezuela’s largest trade partner, imposed sanctions on new debt and equity issued by the government and national oil company PDVSA and is likely to impose sanctions on the oil sector in the one-year outlook.

Russian energy companies are likely to remain important investors in the hydrocarbons sector and Venezuela a major client of the Russian defence industry. China is a key ally of Venezuela and signed several funding agreements in exchange for future oil supplies. Warm relations with Cuba, Venezuela’s closest ally in the region, will continue.

Defence budget trends

As a result of Venezuela’s uncertain political environment and severe economic problems, the country’s defence budget has fluctuated intensely in a variety of measures over the decade to 2018. However, the severity of the recent decline of the country’s currency makes almost every budget of the period practically worthless when viewed in an external currency. Viewed in bolivars, real expenditure on defence grew rapidly from VEF12.3 billion in 2005 to VEF62 billion in 2013. These large increases meant that growth in Venezuelan defence spending outpaced even the damagingly high inflation experienced by the country.

Most of this real growth was achieved through an extremely large increase of 108.2% in 2012, when the defence budget increased from VEF21 billion to VEF39.5 billion in real terms.

Venezuela’s primary sources of military equipment are currently Russia, China and Cuba, although significant shipbuilding work has until recently been conducted for the country by Spain. A great deal of this procurement is funded at least in part through countertrade in oil, or as part of large state-level deals in which access to Venezuelan resources is provided, sometimes through joint ventures with state-owned Petroleos de Venezuela (PDVSA).

Procurement has historically made up a substantial portion of Venezuela’s budget, peaking at 50.9% in 2013. The vast majority of this spending was allocated from state borrowing, through the ‘Special Indebtedness Law’.

Venezuela’s economic difficulties, detailed above, have led to the country’s procurement budget falling to just 2% of total spending in 2017, a historic low. As a result of a 45% military personnel pay rise announced at the end of 2015, an extremely large cut to procurement occurred in 2015, with its share of the defence budget calculated to have fallen to just 11.0% from 34.8% in 2014. Although less dramatic than 2015’s collapse in acquisition, spending on matériel more than halved in 2016, to 4% of the budget.

From 2018 onwards spending on real assets will rise notably as a proportion of the budget as urgent requirements are addressed following several years of underfunding.

Key opportunities Stated opportunities for Venezuela include an opportunity for a main battle tank starting around 2020 with a forecast value of USD35 million.

Other opportunities forecast include upgrades for BMP-3s, T-72s and heavy trucks, totalling USD86.5 million.

LAND VEHICLES MARKET FORECAST (2017 -2026)

Major suppliers

• JSC Almaz-Antey (USD350.3 million). Producing multiple air defence systems for Venezuela (S-300, Buk and SA-3) has been significant from 2009-2015. Logistical support is likely to continue for quite some time.
• Norinco (USD384.5 million): China’s Norinco provides Venezuela with VN1 and VN4 vehicles for amphibious and other roles as well as fleets of trucks.
• JSC Kurganmashzavod (USD113.6 million): deliveries of BMP-3s were completed in 2016 with 123 vehicles. Major programmes
• Self-propelled artillery (USD69.9 million): China has agreed to deliver multiple SPA vehicles under a 2012 USD500 million agreement. The deal includes nine CS/ SM-1 81mm mortar carriers, 18 SR5 122mm MLRS systems and Type 86B 120mm mortar carriers.
• ZBD-05 (USD65.1 million): the 25 amphibious vehicles were delivered through 2017.
• Toyota Land Cruiser (USD50.9 million): the Venezuelan Army is procuring unknown numbers of Toyota Land Cruisers for the light utility vehicle role.

Mexico

Overview

Mexico is a member of the Group of 20 (G20) and the OECD.

The country has improved its economic situation through free trade agreements with more than 40 countries, including the US and Canada in the North American Free Trade Agreement (NAFTA). NAFTA has liberalised trade flows between the two countries, and has made Mexico an attractive destination for FDI from other countries seeking access to the US market. This, alongside Mexico’s historically low labour costs, allowed the country’s manufacturing sector to grow, primarily through exports to the US. This economic model means that Mexico is heavily reliant on the health of the US economy and its continued access to it.

Mexico generated GDP of USD1.1 trillion in 2017 – 2.2% higher than in 2016. In relation to other comparable economies, its growth record is weak, with an average growth rate of 2.6% across the 30 years to 2015.

External relations

The prospects of a failed NAFTA renegotiation will force the country to diversify trade partners, likely strengthening its relation with Asian and EU partners. Mexico is part of the Pacific Alliance, a regional integration initiative working towards the free circulation of goods, services and capital, formed with Chile, Colombia and Peru in 2011. Its relationship with the rest of Latin America is cordial, although it does not actively participate in the region’s common politically related affairs.

National defence

Mexico does not face significant external conventional threats, either from neighbouring states in the region or abroad. As a result, its armed forces have long been primarily focused on supporting internal security as well as in providing assistance and relief to the civilian population in the aftermath of a natural disaster. Mexico enjoys a positive relationship with neighbours Belize, Guatemala, and the US, and favours co-operation, trade, and the promotion of foreign investment.

Military conflict is therefore highly unlikely.

Mexican defence spending grew strongly in the decade to 2015, almost doubling in real terms to reach a peak of USD6.1 billion, giving the country the second largest defence budget in Latin America at the time.

In 2016 this expansion came to an end, however, as Mexico followed the rest of the region in implementing a real cut to defence expenditure. 2017’s real budget cuts are not expected to be repeated, but significant real growth in defence spending is nonetheless not forecast to return until after 2021.

LAND VEHICLES MARKET FORECAST (2017 -2026 )

Market outlook

• USD195 million in derived opportunities: key opportunities include an APC and amphibious APC forecast at approximately USD146 million. Additionally opportunities for an air defence vehicle and IFV for USD35 million and USD14.4 million respectively.

Major suppliers

• AM General: USD114.6 million (deliveries of HMMWV completed in 2017).
• Auverland: USD21.3 million.
• Daimler Group: USD14.1 million. Major current programmes
• HMMWV: 3,335 vehicles ordered for USD504 million.
• ERC 90 Lynx: upgrade of 119 vehicles valued at USD19.7 million.
• DN-XI (USD31.4 million): this family of vehicles includes reconnaissance vehicles and is based on Oshkosh’s SandCat, but assembled by the Mexican Secretariat of National Defence.





(3522 words)
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