GDR 99 - South-East Asian Issues

East-Asian Turmoil
Hits Defence Sales


Section Articles
• Chinese Defence Build-Up • East-Asian Defence Sales • India & Pakistan go Nuclear
Top: The British Aerospace Hawk trainer is a best-seller in the region

Damon Bristow, head of the Asia programme at the Royal United Services Institute for Defence Studies in London. offers a hint of better times to come in troubled Asian waters.

If recent reports and figures are to be believed, the green shoots of economic recovery are flowering in east Asia. In Indonesia, Thailand and South Korea - the three countries worst hit by the crisis - currencies are strengthening, stock markets are rising, interest rates are falling and current-account balances are improving. But it will be some time, before economic growth returns to pre-crisis levels.

That's is bad news for defence exporters for whom east Asia was the emerging market for defence equipment for much of the 1990s. In early 1997 many were even predicting that between 1997 and 2001 the region would import defence equipment worth US$60bn (at constant prices). Since June last year, however, defence budgets across the region have been decimated.

South-east Asia is a good example. It had a combined defence expenditure of over US$18bn, or 20 per cent of total official expenditure in east Asia in 1997. During 1997/98 Thailand cancelled plans to purchase vehicles, attack, heavy-lift and transport helicopters, submarines, and fighters. The draft defence budget for 1999, moreover, has been set at 77.45bn bhat (US$1.99bn), a drop of 44 per cent from 1998. According to some sources this figure includes only 7.5bn bhat (US$160m) for procurement; a figure rumoured to be sufficient to cover only spares and ammunition.


Singapore Technologies Automotive has produced the IFV Bionix 40/50

In January 1998 Indonesia cancelled the purchase of fighters and helicopters from Russia and submarines from Germany. According to recent reports, the Indonesian armed forces (ABRI) are involved in massive cost-cuttings that will result in the 1997 defence budget being slashed by 40-50 per cent. Almost all major procurement programmes, including the acquisition of attack and heavy-lift helicopters, APCs, main battle tanks, artillery, submarines, command, control, communications and intelligence (C3I) systems, and an airborne early warning (AEW) capability, have been put on hold in Malaysia. And in December 1997 it was announced that defence spending would be cut by US$100m, or 10 per cent. October's budget gave no indication that this position would be changed. Finally, in July 1998 the Philippines announced its decision to slip its 15-year $6bn military-modernisation programme. Reportedly, the purchase of off-shore patrol vessels (OPVs), their associated helicopters and a new multi-role fighter have been delayed.

Over in north-east Asia, that accounted for the lion's share of defence spending in east Asia in 1997, the situation is less serious. Only South Korea has been seriously affected. Here delays are expected in the purchase of multiple-launch rocket systems (MLRS), future battle tanks, infantry fighting vehicles, attack helicopters, the indigenously developed and produced KTX-2 fighters, airborne warning and control systems (AWACS), submarines, additional KDX destroyers, and flat-decked ships for amphibious operations. So far the defence budget has not been cut, although devaluation means that its purchasing power from abroad has been reduced.


Small naval craft are top of many South-East Asian navies' requirements

However, a few countries have escaped the cuts. In south east Asia for example Singapore has announced that it will proceed with all known procurement programmes, and that its planned defence expenditure for 1998 will remain untouched at $4.3bn. And Brunei has signed a number of procurement contracts, although its defence budget is thought to have been held at 1995 levels (US$343m).

In north-east Asia, Japan's defence budget increased slightly to 51.3bn yen in 1997 and looks unlikely to suffer radical cuts. Taiwan also has announced that its budget for 1998-99 will increase to US$8.4bn. China also is known to be in the market for defence equipment and its official defence budget rose to US$9.8bn in 1997.

But despite signs of recovery on the horizon, the market is likely to remain generally depressed for three main reasons. First, as with other imports, the majority of regional currencies are still undervalued relative to this time last year. This means the national cost of buying equipment from outside suppliers remains prohibitively high.

Secondly, the International Monetary Fund and the international community are continuing to apply pressure on debtor nations within the region to cut external deficits. This has been passed on to defence and procurement budgets. Finally, although there are signs of recovery in the region's worst-hit economies, they are hampered by high rates of unemployment and burdened by debt. Furthermore, Japan is now officially in recession, China is looking increasingly vulnerable and the chances of a recession in the US are rising. Worse still, the spread of the crisis to Russia has raised fears that what started out as a regional problem could have serious global implications.


Delays are expected in South Korea in various types of equipment including the KTX-2 fighter

For the brave and the hardy, however, some opportunities do exist. These vary between platforms/weapons systems from country to country (in line with national budget forecasts). In the short-term (1998-2002), the major military requirement in east Asia is likely to be for C3I systems, system upgrades and secondhand sales, those systems that provide more bite for your buck.

Because of the continued importance of maritime security issues and the re-focusing of military priorities away from land-based threats towards the protection of maritime interests and economic exclusion zones, orders for OPVs, corvettes, frigates, patrol, attack, and mine countermeasures craft and their associated systems, will hold up and strengthen in the medium-term (2002-2005). But orders for major items, such as fighter aircraft, submarines and tanks, will be severely retarded and only recover in the long- term (2005+).

So far as country prospects are concerned, the best opportunities exist in Singapore, Taiwan and the People's Republic of China (PRC). For European companies the last two markets are at present out of bounds for political reasons, although pressure to change existing policy towards the PRC is growing. In the medium-term, chances are that recently frozen projects in the Philippines, Malaysia, and South Korea, will be restarted.

The long-term prospects are better because regional capability requirements are unlikely to be affected by the economic and financial crisis and the strategic realities that underpinned them largely remain the same. Furthermore, many of these drivers have been exacerbated by the economic crisis. As the middle of the next decade approaches, there will be a better-than-evens chance that many nations in east Asia will have come to terms with the weaknesses that precipitated their sudden decline and will have returned to the path of high and sustainable economic growth. When that happens, defence budgets will return to their pre-June 1997 levels.