China to Exceed Combined Defence Budget of All Other Key Defence Markets in APAC by 2015

Defence Budgets from
IHS Jane’s Defence Budgets

Gross Domestic Product

from IHS Global Insight

Country

2011

2015

Rank by spend

CAGR% (2011-2015)

2011

2015

Rank by GDP

CAGR% (2011-2015)

China

119,803

238,201

1

18.75%

7,945,881

10,918,470

1

8.27%

Japan

60,344

66,560

2

2.48%

6,074,424

6,667,964

2

2.36%

India

35,383

44,909

3

6.14%

1,785,817

2,448,189

3

8.21%

South Korea

31,338

35,479

4

3.15%

1,163,991

1,351,544

5

3.81%

Australia

23,618

27,513

5

3.89%

1,438,964

1,637,225

4

3.28%

Taiwan

9,203

13,496

6 (+1)

10.04%

458,316

550,193

7

4.67%

Singapore

10,011

12,318

7 (-1)

4.41%

262,825

311,570

10

4.35%

Indonesia

6,385

8,809

8

8.38%

842,730

1,066,138

6

6.06%

Pakistan

5,734

7,055

9

5.32%

207,066

248,215

11

4.64%

Thailand

5,465

5,626

10

0.73%

359,684

433,571

8

4.78%

Malaysia

4,214

4,640

11

2.44%

283,916

342,839

9

4.83%

Vietnam

2,776

3,908

12

8.92%

121,936

157,844

13

6.67%

New Zealand

1,969

2,237

13

3.24%

161,376

181,372

12

2.96%

Source: IHS Jane’s Defence Budgets

Source: IHS Global Insight

Ranking based on 2015 CAGR forecasts

Ranking based on 2015 CAGR forecasts

CAGR, Combined Annual Growth Rate, 2011-15

CAGR, Combined Annual Growth Rate, 2011-15

constant 2011, USD$mn

constant 2011, USD$mn

Market

Outlook

Economic, Defence And Geo-Political insights

China

Strong

• With Chinese economy expected to grow at 8% in 2012-15, tax revenue growth good and government debt as share of GDP moderate, the defence budget should be able to grow in line with overall fiscal expenditure plans
• China's defence budget (2011-15 CAGR: 18%) will benefit from the growth in GDP. This growth is a continuation of the double-digit defence budget growth which averaged 12% between 2000-2009. China will reduce its manpower but increase and modernise its equipment, resulting in a higher amount of funding per member of the armed forces.
• Despite China’s ambitious military modernisation, Beijing continues to stress that it will never seek hegemony or engage in any form of military expansionism.

Japan

At Risk

• The combination of a peace-oriented defence policy and a poor economic forecast points to a continued low growth rate in defence spending (CAGR 2011-15: 2.5%). Spend will focus on programmes and equipment needed to defend it against threats from its neighbours
• Due to very high government debt levels and fiscal stimulus required for post-disaster reconstruction, fiscal position is very weak and may impact on spending on defence
• China’s rise has prompted Japan to bolster security ties with Washington. The nuclear issue in North Korea as well as the changed security outlook following the death of the late leader Kim Jong-il in December will also factor heavily in Japan’s defence planning.

India

At Risk

• Economic growth has moderated, significant rupee depreciation in 2011, and government debt and fiscal deficit is very high as share of GDP. However, in the long-term outlook to 2025, India is forecast to become one of the world's largest economies, overtaking Japan in terms of size of nominal GDP, which will result in substantial increases in India's annual defence spending so long as fiscal debt is managed sustainably.
• Increased defence outlays (CAGR 2011-15: 6.1%) are largely offset by high inflation. Military spend hovers around 2% of GDP, substantially less than the 3% demanded by service chiefs.
• China’s ambitions in the Indian Ocean will intensify pressure to increase defences. This is fuelled by growing concern in New Delhi over possible Chinese “strategic encirclement”, as evidenced by Beijing’s development of ports in Pakistan, Sri Lanka, Bangladesh and Myanmar. But these bases are not yet permanent and are likely to be used for re-fuelling and repairing vessels as China seeks to expand and protect trade routes.

South Korea

Stable

• Firm economic growth is expected to continue. Government debt to GDP is moderate.
• Proposed rises in defence spending (2011-15 CAGR: 3.2%) are short of those outlined by South Korea's Defence Reform 2020 plan. The South Korean government is expected resume higher levels of growth once the country's economy returns to a healthier rate.
• As with Japan, China’s rise has prompted South Korea to bolster traditional security ties with Washington. Like Japan, South Korea’s defence planning will also factor in the nuclear issue in North Korea and the changed security outlook in the country following the death of the late leader Kim Jong-il in December.

Australia

Stable

• Firm economic growth expected in 2012-15. AUD is strong and fiscal position is very good albeit government is under pressure to bring budget into balance over medium term.
•  The government has set defence budget growth at 3% in real terms until 2017, although an ambitious equipment programme prompts doubts as to whether the defence budget will rise quickly enough to meet these demands.
• Obama’s announcement of plans to base US marines in northern Australia have also underscored the importance of Australia’s role in Asia’s shifting security landscape.

Taiwan

Stable

• Firm economic growth expected to continue, moderate government debt, very strong foreign assets as net creditor nation
• With the Taiwanese government focusing on the development of a diversified society, social welfare provision and overall economic development, the proportion of the state budget allocated to national defence is falling. Although recent budgets indicate that the government would like to reverse the trend and increase defence expenditure, political factors make this a difficult prospect as the budget requires parliamentary approval.
• The election of Taiwan President Ma Ying-jeou to a second term of office in January 2012 suggests a stable cross-Strait security outlook for the near to medium-term, although the issue will continue to have a significant impact on long-term regional defence planning.

Singapore

Stable

• Strong current account and SGD currency, very sound public finances, but economic growth momentum moderating in 2012 due to Eurozone crisis impact on exports.
• The Ministry of National Defence has adopted a long-term approach to financing its defence requirements, with consistent funding at around 3.75% of GDP considered to be sufficient to meet modernisation requirements. However, procurement funding is flat for the forecast period, with a 2011-15 CAGR of just over 1%.

Indonesia

Strong

• Economic growth is robust, government debt and fiscal deficit low as share of GDP which will allow scope for increased defence spending
• Aspirations to spend 1.5% of GDP on defence by 2014 will not be met, although substantial growth has been made from a low base. Replacement and upgrade of ageing military platforms and greater defence industrial self-reliance are key drivers.
• Perceptions of growing Chinese assertiveness have led ASEAN countries (including Japan and South Korea) to press China to be more closely involved in regional security issues.

Pakistan

At Risk

• Pakistan’s finances are in poor shape, with a high fiscal deficit and heavy debt-servicing costs, while the current account deficit is widening. Moreover Pakistan obtained a IMF balance of payments rescue package in 2008 and now faces very large debt repayments of its IMF borrowings due in 2012 following IMF suspension of further financing.
• Increases in its defence budgets are offset by double-digit inflation. A myriad of internal and external security concerns guarantee a level of spending at just under 3% of GDP.
• Like India, Pakistan, will be factoring in China’s growing ambitions in the Indian Ocean area which will intensify pressure on the region’s governments to increase defence spend.

Thailand

Stable

• Generally strong fiscal position and a net creditor nation, with good external account position, but impact of devastating floods has put pressure on government budget in 2012 due to need for post-flood reconstruction and flood prevention infrastructure.
• Devastating flooding and a relatively weak economic outlook have impacted upon Thailand’s defence outlook (CAGR 2011-15: 0.7%). This low growth rate corresponds to the government's pre-election pledge to reduce Thailand's deficit by 2015, although funds for the majority of big ticket procurements are ring fenced.

Malaysia

Stable

• Economic growth still firm, strong external account surplus keeps MYR ringgit strong, but government debt to GDP ratio is somewhat high putting pressure on government to constrain public finances.
• Defence budget growth is flat (CAGR 2011-15: 2.4%), and with opposition parties making any military procurement announcements a campaign issue, the Malaysian government appears to have adopted a cautious approach towards signing for any major acquisitions that do not involve local industry.

Vietnam

At Risk

• High fiscal deficits, very low foreign exchange reserves and risk of more currency devaluation are key risks to defence budget
• The defence budget is set to reach 2.5% of GDP by 2015. Although a strong defence relationship with Russia has enabled a string of big procurements, the key driver of modernization lies with the army’s capacity to relinquish its dominance over the state.
• Southeast Asian countries such as Vietnam have been keen to strengthen their naval combat abilities in order to counter China’s growing strategic presence in the region, particularly regarding the disputed Paracel and Spratly Islands in the South China Sea.

New Zealand

At Risk

• Significant deterioration in medium term public finances in New Zealand since 2009 combined with cost of post-disaster reconstruction following Christchurch earthquake is constraining public finances in other areas.
• Financial pressures will prompt it to take a more rigorous approach to defence spending (CAGR 2011-15: 3.2%), and the country will seek to deliver the procurement objectives outlined by its 2011 defence capability plan in a more fiscally constrained way.