BMI View: Given President Duterte ' s recognition of the need to address military capability gaps identified under the former government's modernisation plan; his apparent favouring of a more independent foreign policy; and his vow to address internal security threats, we expect Philippine defence spending to see steady growth in coming years. Modernisation efforts will focus on counterterrorism/insurgency in 2017 - given ongoing offensives against militants - but increasingly cover the naval and air power segments over the longer term, as Manila works to strengthen protect ion of the country's air space and waters. Amid defence spending increases , growing international in volvement with the local sector and stronger government support for its development, the outlook for Philippine military manufacturers is brightening. Nevertheless, given the ir near-complete lack of design and development capabilities, Manila will remain reliant on foreign defence suppliers over the next decade.
|Note: Includes funding for military modernisation, excludes military pensions; f = BMI forecast. Source: ADB, BMI|
|Defence expenditure, % of GDP||1.0||1.0||1.0||1.0||0.9|
|Defence expenditure, USDmn||3,311||3,771||4,019||4,367||4,726|
|Defence expenditure, USD, % y-o-y||4.6||13.9||6.6||8.6||8.2|
For 2017, the Duterte administration has proposed a y-o-y defence budget increase of around 15% to PHP134.5bn (USD2.9bn) - not including military procurement, which falls under the AFP Modernization programme. Of the base budget, the vast majority would be directed towards the army (PHP56.9bn), with PHP20.6bn allocated for the navy and PHP18.9 for the air force. Funding for modernisation would come in at PHP25bn.
The 2016 Asian Defence, Security & Crisis Management (ADAS) expo held in Manila in September saw a 42% y-o-y increase in the number of exhibitors. During the expo, South Korea's Kia Motors and several Israeli companies expressed interest in collaboration programmes with Philippine defence companies. In addition, the Philippines' Government Arsenal outlined plans to set up an in-country defence industrial zone. These developments bode well for the country's domestic defence sector.
Manila signed an agreement for the supply of defence equipment and technology from Japan in March 2016, and was in talks with Moscow over potential defence industry collaboration and trade in September 2016.
Japan is set to provide the Philippines with multirole response vessels under a 'soft loan' arrangement. Manila is also in discussions with Tokyo over the procurement of two large-sized patrol ships, as well as the leasing of five Beechcraft TC-90 King Air advanced trainer aircraft.
In September 2016, South Korea's Hyundai Heavy Industries (HHI) received an USD337mn order from Manila for two light frigates for the Philippine navy.
The Philippine Marine Corps will receive eight amphibious assault vehicles from South Korea-based Hanwha under a USD50mn contract announced in Q116.
The Philippines in April 2016 received two C-130T Hercules transport aircraft from the US. Manila has also acquired a Hamilton-class high-endurance cutter and a (former) Melville-class oceanographic research ship from the US.
The Philippine navy has acquired three (former) Balikpapan-class landing craft from Australia.
In March 2016, the Philippine defence department announced it had chosen the AgustaWestland AW159 Lynx Wildcat to meet its navy's anti-submarine warfare helicopter requirement.
In September 2016, IAI reported to be in preliminary discussions with Manila over a deal to supply the Philippine navy with its Super Dvora MKIII fast attack craft.
The Philippine air force has a requirement for close-air support aircraft - for which a request for proposals is reportedly to be re-issued 'shortly'.
In August 2016, the air force confirmed plans to procure additional attack helicopters.
In March 2016, the defence ministry announced it had revived a USD126mn programme to acquire two long-range patrol aircraft.
Saab has announced it plans to open an office in Manila by end-2016, in an attempt to sell its Gripen fighter to the Philippine air force.
A military offensive against Abu Sayyaf Group (ASG) has resulted in heavy casualties for the terrorist organisation, and will likely lead to a short-term weakening of its capabilities. That said, ASG leadership has warned of attacks in response to the offensive, and the group still retains significant numbers of fighters and weapons. We believe the frequency of strikes and kidnappings is likely to intensify in 2017.
Leaders of militant groups Moro Islamic Liberation Front (MILF) and Moro National Liberation Front (MNLF) met with Duterte in June 2016 to discuss peace agreements.
The chances of a lasting peace deal between Manila and the country's Communist rebels have improved with Duterte's election to office. Peace talks have resumed, and the rebels have indicated willingness to negotiate with the new president. Nevertheless, the situation remains highly fragile on the ground.
We believe Duterte's crackdown on criminal activity will lead to a reduction in crime rates in coming years. That said, security forces' heavy-handedness could lead to reprisal actions, both by criminal organisations and indignant relatives of victims. In addition, they could complicate Manila's relationship with foreign governments that have expressed concerns about the campaign on human rights grounds.
In July 2016, the Permanent Court of Arbitration ruled that China's historical claim over more than 80% of the South China Sea was invalid.
Duterte has adopted a noticeably anti-US tone, while sounding more accommodating towards China over his first few months in office. He has increasingly emphasised that he will pursue an 'independent foreign policy' that would entail warmer relations with China.
Defence Industry Risk Reward Index (RRI)
Demand for defence equipment in the Philippines remains strong, given large-scale military modernisation efforts and the range of security threats faced by the country. This boosts the Philippines' score in the Industry Rewards segment of our Defence Industry RRI. Meanwhile - although set to improve in coming years on the back of reforms - economic and investment openness in the Philippines remain moderate at present, lowering its Country Rewards Score. On the risks side of the matrix, high levels of defence imports boost the country's overall performance, while a limited defence budget compared regionally; moderate levels of labour market and manufacturing sector quality; and persistent corruption weighs it down. Overall, we award the Philippines a Defence Industry RRI score of 49 out of 100 for 2017, ranking it ninth out of 14 Asia Pacific states.
The Philippines Defence & Security Report features BMI Research's independent forecasts for national and international security, the defence industry, military expenditure, employment in arms production, and arms imports and exports, as well as examining industry trends and prospects, national and multinational arms producers and the regulatory environment.
BMI's Philippines Defence & Security Report provides professionals, consultancies, government departments, regulatory bodies and researchers with independent forecasts and regional competitive intelligence on the Philippine defence and security industry.
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Snapshot evaluation of the major issues affecting the defence and security sectors, economy and politics, with issues subdivided into strengths, weaknesses, opportunities and threats.
BMI Industry Forecast Scenario
Historic data series and forecasts to end-2019 for key industry indicators supported by explicit assumptions, plus analysis of key downside risks to the main forecast.
- Defence Expenditure: Defence expenditure (local currency and USDbn); defence expenditure (% of total budget); defence expenditure per capita (USD); defence budget (local currency and USDbn).
- Armed Forces (to 2012): Manpower available for military service, manpower fit for militaryservice, army personnel, navy personnel,air force personnel, total armed forces, (‘000) (% population).
- Arms Trade: Arms and ammunition exports and imports (USDmn); bombs, grenades and missiles exports and imports (USDmn); revolver and pistol exports and imports (USDmn); weapons excluding guns and swords exports and imports (USDmn).
Political Risk Assessment
Drawing on BMI’s heritage of more than 25 years of Country Risk analysis, this comprehensively evaluates the key risks to domestic politics and foreign relations, focusing on issues most likely to affect either domestic security or the defence sector.
Security Risk Analysis
BMI’s proprietary Security Risk Indices provide investors with a reliable and country-comparable guide to conflict, terrorism and criminal risk, backed up by our analyst’s latest assessment of each component. Furthermore, drawing on our Country Risk expertise, we assess the state’s vulnerability to a serious, or prolonged, terrorist campaign.
Armed Forces Spending/ Expenditure
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