BMI View: We expect South Korea's defence budget to continue increasing in absolute terms in the next five years. This will be driven by South Korea's need to maintain well-prepared and well-equipped armed forces to deter, or defend from, an attack from North Korea. Moreover, the 2014 Defence White Paper puts significant emphasis on the government's desire to continue expanding the domestic defence market, providing additional support to private companies seeking to participate and increasing exports worldwide. This will contribute to opening up development opportunities for both international and national companies operating in the defence sector.
The conflict that has been characterising South Korea's relationship with North Korea in the past sixty years remains to date the country's main driver for defence spending. Indeed, despite many attempts from Seoul to convince Pyongyang to establish a dialogue and resolve the situation peacefully, the latter has continued to carry out nuclear tests and regularly threatens to attack the former. As such, South Korea is constantly working to maintain and upgrading the equipment and capabilities of its armed forces in order to be prepared for an eventual attack or even as a simple deterrent. Significantly supported by the US, which has 29,300 troops on the territory and supplies a significant share of the country's equipment, South Korea maintains its advantage over its northern neighbour, but a new strategy is necessary if the situation does not drastically change in the near future - that is, if North Korea does not collapses.
The 2014 Defence White Paper highlights such strategy, which is focused on two main objectives. Firstly, South Korea will reorganise its armed forces in order to ensure that they are as flexible and adequately prepared as possible in the event of an attack from the North. The army will therefore see a reduction in the number of personnel, but this reduction will be compensated by a number of measures to increase its efficiency, including: better training, better living conditions, better pay and state of the art equipment and capabilities. The navy and the air force will maintain the same number of personnel, but a significant upgrading of their platforms is foreseen in the procurement programmes for the coming years. For instance, in March 2015 KAI was selected with its partner Lockheed Martin to develop 120 indigenous fighter jets for the air force, while in June 2015 the Defence Acquisition Programme Administration (DAPA) announced that it will invest in the development of class frigates and surface-to-air missiles for its navy.
Secondly, in order to fulfil these needs, South Korea will seek to expand and diversify its domestic defence. The Defence White Paper puts particular emphasis on technological transfer with key defence cooperation partners and on increased investments in the country's defence R&D facilities. It will also provide more support for private companies looking to enter the domestic defence market. These steps will not only ensure that the country's exports increase in the coming years as the domestic market expands, but will also contribute to decreasing the country's dependence on its international and regional defence partners (especially the US) in relation to capabilities.
Key BMI Forecasts:
We forecast South Korea's defence spending to reach USD34.1bn by 2015, which would signify a 2.6% year-on-year (y-o-y) decrease. It will however be compensated by an increase of defence spending in 2016, reaching USD36bn for a 5.4% (y-o-y) increase.
We forecast South Korea's defence spending to decrease to 2.4% as a share of the country's GDP but to then remain stable at that level in the next five years.
South Korea will maintain, in 2015, a defence trade balance with a surplus, which will continue increasing in the coming years as the country expands its domestic defence market.