Defense News
11/03/08
In Asia, Defense Budgets Stuck in Limbo
By Wendell Minnick
TAIPEI — Top-tier Asian defense spenders such as China, India, Japan, South Korea, Singapore and Taiwan may ride out the global financial storm with minor shifts and procurement delays, but smaller economies in Southeast Asia — Indonesia, Malaysia and the Philippines — will suffer more, analysts and observers said.
“Japan is already on the razor’s edge, since its economy has been more or less static for more than 15 years, and this has been reflected in stagnant, even declining, military spending,” said Richard Bitzinger, a fellow at the Institute of Defence and Strategic Studies at Singapore’s S. Rajaratnam School of International Studies.
“I find it hard to believe that defense won’t be required to take a big hit.” However, Japan, Taiwan and South Korea could resist major cuts in defense spending in the short term due to commitments to “recapitalizing their militaries,” he said.
Bitzinger said the South Korean military, whose budget was cut to aid the country’s recovery from the late-1990s Asian financial crisis, may resist a new round of reductions.
“Seoul has undertaken a huge program to make the country more self-reliant for its own defense — and in particular, less reliant on the U.S. — and domestic political feelings could be manipulated to keep those programs alive,” he said.
In Taiwan, which recently re-emerged from an eight-year decline in procurement, delayed modernization programs will be hard to ignore. The recent release of $6.4 billion in U.S. arms sales to Taiwan will most likely go forward, but future plans for F-16s and submarines could be delayed or canceled.
Southeast Asia
Singapore, which has no political opposition to the military, will most likely continue to pursue big-ticket items from the United States and Europe.
“However, Singapore is primarily a financial center, so it could be particularly hard hit by this crisis,” said Sheldon Simon, a specialist on Asian defense budgets.
The rest of Southeast Asia most likely will get hit hard. Corruption, poor planning and a history of poverty will only get worse as economies decline.
“The countries most likely affected with respect to major purchases are Malaysia and Indonesia,” Simon said. “Secondarily, I would expect Vietnam and Thailand to delay purchases as well. The Philippines is perennially short of resources, so paradoxically, the global crisis may have less impact on Manila.” Malaysia recently canceled the planned purchase of 12 Eurocopter EC725 helicopters for $650 million, blaming economic difficulties.
Simon said many of these countries may turn to Russia and China, which may accept non-cash payment.
“Countertrade arrangements might be proposed by which local products are traded for military equipment. Sometimes China and Russia have accepted countertrade, but I don’t think Western suppliers will,” he said.
Japan, Singapore, South Korea and Taiwan are major customers of U.S. military equipment. Japan wants F-22 fighters, Taiwan wants F-16 fighters and submarines, and South Korea’s 2020 plan includes new tanks, fighters, ships and continued costly financial commitments to counter North Korean aggression.
India
The economic meltdown has little affected India’s defense spending, thanks largely to the Defence Ministry’s inability to spend the money it has. But the failure to execute planned purchases of U.S. arms and gear means those items will be more expensive, thanks to the surging dollar.
Delays in procurement programs mean the ministry was already planning to spend about $1 billion less than its 2008-09 allocated budget of $26.4 billion. That money will be returned to the Indian treasury.
That has been true in most recent years. In 2006-07, the ministry returned $652 million once planned for weapon and equipment purchases; $288 million in 2005-06; none in 2004-05; $1.1 billion in 2003-04; and $2 billion in 2002-03.
“The current economic crisis has not impacted India’s spending on defense, and there is no dearth of money for purchasing weapons and equipment,” a senior Indian Defence Ministry official said.
But defense analyst Mahindra Singh, a retired Army major general, notes that Indian planners have lost billions of dollars by failing to ink procurement contracts when the dollar was cheap.
In February, the defense budget for the financial year beginning April 1 was $26.4 billion, based on an exchange rate of 40 rupees to $1. At press time, the rupee had fallen to around 50 to $1, lowering the budget by $5.28 billion in dollar terms.
China
China might turn out to be the winner with cheap reliable equipment options from Russia and its own indigenous production capabilities.
Predictions about the financial crisis’ impact on the Chinese economy vary widely, thanks to a lack of transparency.
“While some analysts see a serious economic crisis coming in China over the next five years, others emphasize the economic strength of China and its potential role in helping to stabilize the global financial system and the U.S. dollar,” said Elisabeth Sköns, program leader for Military Expenditure and Arms Production at the Stockholm International Peace Research Institute.
Though arms sales from Russia have slowed over the past five years, there are high expectations Beijing will pursue the procurement of Sukhoi Su-33s for a planned aircraft carrier. There have been unconfirmed reports China and Russia have discussed the procurement of up to 50 Su 33s for $2.5 billion.
However, China was hit hard before the economic crisis. Beijing just announced a gross domestic product (GDP) drop of 9 percent this quarter.
Two major economic drains — the multibillion-dollar Olympics and earthquake relief — are largely responsible. With the global economic downturn and a domestic economy that is largely export-based, expectations are the military will take some budget hits.
“While the financial crisis has had an impact on Chinese economic growth, partly due to its impact on Chinese exports, this represents deterioration from rather high growth rates,” Sköns said.
“Furthermore, China has the option of stimulating its large domestic economy to compensate for the falling external demand. Second, China is the country with the largest foreign currency reserves, now reportedly standing at 1.81 trillion dollars.”
In comparison with other toptier Asian defense spenders, the recession will not be as bad for China’s military for largely domestic political reasons, Bitzinger said.
China has “large public commitments to keeping up defense, pushing forward with expensive military rearmament programs along the lines of the Revolution in Military Affairs,” and Beijing’s oneparty rulers do not face “any real [political] opposition to continuing these programs.”
Also, “Chinese military expenditure accounts for a relatively small economic burden in terms of its share of GDP (2 percent), and its arms procurement can rely on its significant domestic defense industry,” Sköns said.
During the 1997-98 Asian financial crisis, several Asian countries suspended major arms procurements rather than cancel them and were able to resume these once their economies recovered. “If the economic impact on these countries will be as serious this time, they may react in a similar way,” Sköns said.
Vivek Raghuvanshi contributed to this report from New Delhi.
