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Business not quite as usual

South-east Asia's defences take a battering

Damon Bristow, co-ordinator of the Asia Programme at the Royal United Services Institute in Whitehall, London, predicts countries in south-east Asia will strengthen their defences in spite of current financial difficulties.

It came like a bolt out of the blue: on 15 October 1997 Singapore announced that it had bought an undisclosed number of Igla shoulder-launched, air-to-air missiles from Russia. This latest boost to Russian efforts to break into the south-east Asian market comes at a difficult time for the region's armed forces. Since June 1997 the value of the Thai baht, the Malaysian ringitt, the Indonesian rupiah and the Philippine peso have plunged against the dollar by between 20 and 50 per cent. Thailand and Indonesia have been forced to call in the International Monetary Fund (IMF) to help sort out their problems and Indonesia, Malaysia and the Philippines have pledged to cut back public spending and halt construction of a number of high-profile projects. And spending on defence procurement has not escaped unscathed.

CKN's plans to sell armoured vehicles to Thailand could be threatened

This marks something of a change. Between1992 and 1996 the estimated export market value of the Asia-Pacific region was $60bn, making it the second-largest market in the world for defence exports after the middle east; and between 1990 and 1996 countries such as Indonesia, Singapore and Thailand increased their defence budgets by over fifty per cent. According to forecasts, the total market for defence exports to Asia was predicted to rise to $70bn between 2002 and 2006. In keeping with this trend, spending by south east Asian nations also was expected to rise.
Not any more. For a start the devaluation in the region's currencies means that the cost of buying defence equipment could rise by up to 50 per cent. At the same time the need to cut the excessive external deficits that lie at the root of the region's financial problems will place its previously burgeoning defence budgets under severe strain for the foreseeable future.

Take the example of Thailand. Under August's IMF plan the country is expected to cut expenditure in a variety of areas that exclude health and education and according to recent reports its planned defence budget for 1997 will probably end up being slashed by 25 per cent by the end of the financial year. The planned procurement of submarines, escort frigates, corvettes, dipping sonar and a point defence system for the country's new aircraft carrier have all been put on hold. The $200m order for armoured vehicles also looks certain to be frozen while the plan to purchase attack, transport and heavy-lift helicopters is most likely to be cancelled. The rumour is that government accountants are also working hard to try to find the cash required to pay for hardware that has already been acquired.
Much the same is happening in Malaysia whose currency has suffered almost as much as Thailand's. In early September the country's defence minister, Datuk Syed Hamid Albar, told reporters that planned defence equipment acquisitions would be re-scheduled as part of the government's plans to cut the current-account deficit. Under the new budget that was released on 17 October cuts of 300m ringitt ($89m) are planned from the total of 2.78bn ringitt allocated for defence development under which procurement falls. Reports suggest that the acquisition of a new naval helicopter, a rapid deployment capability for the army and the $1.3bn project for 27 new helicopter-capable offshore patrol vessels, may be put on hold. The planned purchase of submarines, for which the military hoped to find funding in 1998, also appears to be a non-starter for the foreseeable future.

Although Indonesia has had to call in the IMF, so far it has not suffered quite so severely at the hands of speculators as have its neighbours. So far there has been no formal statement on whether or not its defence budget will be cut and projects cancelled. However the decision by the government to cancel a total of 81 state and private sector projects and the decision to invite the IMF to help them out with their problems suggests that cancellation of some orders and the shelving of proposed projects may well be announced in due course.
It's a similar situation in the Philippines. Although during recent years the country's defence spending on new equipment has been limited, last year Manila announced its intention to embark on an ambitious 15-year,
$6.24bn procurement plan. This may now be revised. The search for a new combat aircraft to replace the country's ageing F-5As is the project most likely to be cut.
And yet any suggestions that the increasingly defence-minded nations of south-east Asia will stop buying defence equipment completely is somewhat wide of the mark. For a start, continued efforts to address their economic problems means that in the long term market confidence will grow again and the value of the region's currencies eventually will return to their original value.
Furthermore in countries such as Thailand and Indonesia where the military plays an active role in politics, the chances are that when decisions are made about where cuts will take place it is likely that military pressure will fight successfully against a massive reduction in defence spending.
Nevertheless, some changes are to be expected. For example new-found concerns about price and an over-reliance on traditional markets will re-inforce the growing trend among the majority of south-east Asian nations that has been apparent in the past few years, to look elsewhere for better deals and cheaper sources of equipment and spend less on expensive vanity purchases.
The market for second-hand equipment, that already is growing in the region, is likely to get a boost. For example Indonesia already has purchased a large chunk of the former east German navy's equipment and recently has signed a memorandum of understanding (MOU) with Germany to buy five second-hand Type 206 submarines. Thailand also has a number of second-hand American M-60 battle tanks, Knox class frigates and Orion P35 in its defence inventory.
Yet another possibility is that as time passes and confronted with the prospect of higher import costs, some south-east Asian nations will press ahead with their efforts to develop their own defence industries. However demand for second-hand equipment and the movement towards local production are unlikely to meet the long-term need in the region for the high-technology platforms that are too expensive to produce domestically.
This could open the door even wider for Russian and perhaps Chinese arms exporters.
And because their prices are already between 65 and 70 per cent less than their western counterparts, their equipment is an obvious alternative. More importantly, both countries have proved themselves willing in recent years to offer attractive barter agreements, payment instalment plans and, in Russia's case, technology transfer.

With cuts in spending on defence procurement, the market for second hand equipment is growing. Thailand has a number of second hand Orion P35 in its inventory

For a number of technical and strategic reasons the majority of south-east Asian countries are unlikely to look seriously at buying all their equipment from either China or Russia. On top of this, the region's traditional suppliers in the west will make their task easier by offering countries good after-sales packages, servicing agreements, follow-on technology, technology transfers, training and sophisticated financial deals to tide them over in the interim. There is no doubt that eventually the demand for defence equipment in south-east Asia will return to normal and although it is certain to be a more competitive marketplace traditional suppliers will be well-placed to reap the rewards.

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