BMI View: Rising tensions with China have seen the Philippines significantly increase defence spending with the aim of revamping their military assets. Relations with China have further deteriorated following territorial disputes in early 2014. In addition, the Southeast Asian country is facing new internal threats by insurgent groups, especially Abu Sayyaf . These developments will therefore drive an increase in budget allocation towards defence spending by the government, which will reach USD3.4bn in 2015 . The lack of a clear strategic defence spending policy, however, and the under-developed domestic defence manufacturing sector, will open up opportunities for international companies but limit them within the country.
The Philippines' position close to China and the South China Sea, and the recent dispute over conflicting territorial claims in the Sea that has seen the Philippines take China to the UN Arbitral Tribunal, makes the country particularly interesting for a large number of powers in the region and internationally. As such, in the past decade the Philippines has been developing a number of defence cooperation agreements, with different countries, that not only aim at facilitating technology transfer but also provide assistance (whether financial or material) to the Philippines in modernising its military force.
Indeed, the Philippines currently has one of the weakest military forces in the region, in large part as a result of the obsolete equipment and platforms that are being used by its army, navy and air force. The 2012 Defence White Paper recognised this challenge and outlined a strategy to prompt the modernisation and upgrading of its armed forces. However, despite a constant increase in the defence budget in the past few years, the government has fallen short of its initial objectives.
The domestic defence sector remains significantly under-developed. The government has failed to recognised, thus far, the importance of the private sector and has not succeeded in promoting and facilitating the development of domestic defence companies. It therefore continues to rely significantly on imports from international companies. The procurement process, however, has been marked by a number of corruption scandals, and its complexity has deterred international companies from participating. The Philippines government has recently passed a number of guidelines and measures to improve the transparency and accountability of the process, but we believe these will take a while to bear fruit. Similarly, although the government has made attempts at kick-starting the development of its defence sector, through the Defence Acquisition Systems, we also believe that this is not sufficient for the push it needs to improve significantly. The Philippines will therefore continue to rely on imports for the short and medium term at least.
The continued presence and violence of the Abu Sayyaf Group has prompted the government to prioritise counter terrorism equipment. In addition, the Philippines is seeking to modernise the equipment and platforms of its navy and air force in order to increase its presence in the South China Sea and be able to adequately protect its interests there against China. However budget restrictions and competing priorities have resulted in a lack of clear strategic spending policies.
We forecast the Philippines defence spending to reach USD3.4bn by 2015, which would signify a 4.9% year-on-year (y-o-y) increase.
We forecast the Philippines defence spending to continue decreasing as a share of the GDP in the next five years, going from 1.2% in 2015 to 1.1% in 2016 and dropping to 1% by 2019.
The Philippines will maintain, in 2015, a defence trade balance that shows higher levels of imports compared to exports: as the domestic defence market struggles to develop, the deficit will be maintain in the next five years.