BMI View: We expect Vietnam's defence budget to continue increasing in absolute terms in the next five years. This will be driven by the country's need to significantly modernise its armed forces, in particular its navy, in order to counter maritime piracy and increase its military stance against China in the South China Sea. Despite this increase, however, the budget will remain limited compared to the significant changes that are needed, as well as the investments required for the development of the domestic defence sector, therefore the number of opportunities for third parties seeking to enter the Vietnamese defence market will remain limited for yet another few years.
Vietnam's 2009 Defence White Paper highlights a national defence policy that focuses essentially on the development of armed forces for the purpose of defending the country's sovereignty and integrity. Little to no priority is given to the development of a domestic defence sector built for the purpose of providing the armed forces with sufficient and adequate equipment to intervene overseas, or for with the aim of increasing exports. As a result, the domestic defence market has remained significantly under-developed, with the majority of the armed forces needs being fulfilled by imports from Russia, a policy that has been characterised by a constant deficit in Vietnam's defence trade balance. The domestic defence sector, state-owned, comprises primarily two main companies and has seen a number of corruption scandals affect the defence procurement process in recent years.
The regional situation in which Vietnam finds itself, however, has led the General Department for Defence to modify its policy focus and priorities. Indeed, tensions between China and Vietnam regarding the conflicting territorial claims over the Paracells and the Spratlys islands are not likely to end in the near future. Both countries have recently indicated that they would like to find a peaceful resolution to these conflicting claims, but China's early 2015 actions in the region have raised significant concerns amongst Vietnam's allies who are now pushing for the country to modernise its navy and increase its presence and stance in the South China Sea in opposition to China. Moreover, in the past few years Vietnam has seen an increase in the number of maritime piracy incidents along its Southern coastline, bringing to the fore the importance of upgrading its Coast Guards' equipment.
In responses to these challenges, Vietnam has indicated that it will be seeking to expand its currently very limited domestic defence industry in order to modernise its armed forces. Particular attention ought to be paid to the navy, as the main responsible body for defending the interests of the country in the South China Sea. The main strategy for expanding the development industry will be to continue signing defence cooperation agreements with other countries in order to facilitate technology transfer. Imports are also set to continue as they have over the past decade, maintaining a constant defence trade balance deficit. Finally, Vietnam will also seek to diversify the countries from which it is importing, as it is currently mainly trading with Russia. In this context, the US, Vietnam's main foe since the end of the war in 1975, has taken advantage of tensions in the South China Sea to begin a significant rapprochement with the country, and has recently announced that they would provide Vietnam with USD18mn in order to upgrade its navy. This falls within the US strategic goal to increase their presence in the Asia Pacific region, building strong defence alliances in order to counter Chinese rising military power against all the other countries in the region.
Despite these important policy shifts, we expect that it will take Vietnam a few years to be able to develop its domestic defence sector, especially in view of a limited, albeit increasing, budget. Opportunities for procurement will continue increasing, but opportunities to enter the Vietnamese defence market may still be a little way away as the country takes time to implement the required changes.
Key BMI Forecasts:
We forecast Vietnam's defence spending to reach USD4.7bn by 2015, which would signify a 10.6% year-on-year (y-o-y) increase.
We forecast Vietnam's defence spending to remain stable at a 2.4% share of the country's GDP in the next five years.
Vietnam will maintain, in 2015, a defence trade balance that shows high levels of imports and quasi non-existent exports: while imports will continue to rise in the next five years, export levels will remain non-existent, thus incurring an increase in the defence trade balance deficit.