BMI View: Defence Spending in Malaysia will be ramped up in 2015, with a 10% budgetary increase announced in October 2014. We expect a slight increase in procurement activity while the majority of the development budget will be dedicated to expanding existing projects. The release of a new five year development plan and a review of Malaysia's defence offsetting programme could yield changes for the indigenous defence sector when unveiled in 2015. Malaysia enjoys peace and stability with regards to internal and external security threats. Key concerns include continued incursions by Filipino groups and rising piracy in regional waters.
We expect import volumes to grow in 2015 in line with the 10% year-on-year (y-o-y) defence budget increase, announced in October 2014, with development expenditure for 2015 set at USD1.0bn compared to USD0.8bn in 2014. The government has yet to announce the specific breakdown of development expenditure, but we expect investment in maritime and aviation assets. The navy will see construction of six Second Generation Patrol Vessel-Littoral Combat Ships begin in Q115, with the steel for the ships to be cut at a plant in Holland before being shipped (in a complete building kit) to the Boustead Naval Shipyard. While Malaysia's air force is set to take delivery of the first of four Airbus A400M Atlas transport aircraft in early 2015.
Defence spending was a low priority under the 2014 budget, which was tailored by the ruling party to secure popular support ahead of the 2014 general election. As a result, various requests for financing by the armed forces have been denied and many programmes, such as the multirole combat fighter programme, have been put on hold while the government has been working on a new five-year national development plan, which will be released in June 2015. New defence procurement strategies will therefore be announced in line with the 11th Malaysia Plan (2016-2020). Defence officials have also ordered a review of the defence offsetting programme, which has so far failed to drive meaningful development of the indigenous defence sector. Local defence firms under-invest in research and development, and rely on international joint ventures to drive innovation. The Malaysian Industry-Government Group for High Technology (MIGHT) is reviewing the offset programme and resulting recommendations could see changes in Malaysia's defence sector.
The Ministry of Defence will continue to focus on strengthening maritime and aviation capabilities in line with regional security dynamics. Following the 2013 incursion into Sabah by Filipino militants, there is a strong emphasis on strengthening surveillance and upgrading defence equipment to deter further territorial incursions. The 2014 budget included six Second Generation Patrol Vessel-Littoral Combat Ships, four cargo aircraft and support equipment and armoured vehicles. Other plans include support ships, training aircraft, utility and attack helicopters, and multirole combat fighter which are now to be procured on a lease agreement.
Malaysia's regional security situation also remains generally benign and the major threats in 2015 will be from piracy off the country's waters. Malaysia's relations with neighbours Thailand, Singapore and Indonesia are cordial, and China's territorial disputes with a number of countries in the region has so far had relatively little impact on Malaysia. A visit last year by the Chinese premier resulted in the signing of a new strategic pact between Malaysia and China. Even though Malaysia already engages in defence industry collaboration with China, especially in the area of missile technology, these joint efforts are now likely to deepen, with the Malaysian industry as the likely beneficiary.
In addition, in late May, the Association of South East Asian Nations (ASEAN) made steps towards establishing a formal arrangement for regional defence industry collaboration. Defence ministers of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam concluded the conference by agreeing to a three-year programme, addressing the region's defensive needs.
Key BMI Forecasts:
Defence expenditure is expected to reach USD5.4bn in 2015.
Imports are expected to reach USD55.8mn over 2015.
Exports are expected to amount to more than USD5.1mn over 2015.