Oil price drop flat lines global defence spend

According to IHS, defence spending is forecast to flat line globally over the next two years as fiscal constraints among oil producing states in the Middle East and North Africa remove a key source of growth.

Key highlights and forecasts from the IHS Defence Budgets Annual Report are:

• By 2019, for the first time in history, NATO will not account for the majority of worldwide defence expenditure, having accounted for almost two thirds of global spending as recently as 2010.
• By 2020, defence spending in Asia Pacific will exceed that of the US, if sequestration continues; at present the US outspends the region by US$170 billion.
• Rapid growth in the Middle East and North Africa will come to an end as oil revenues slump.
• Despite a 2% cut in 2014, the UK resumed its position as the third highest spender on defence above Japan, Russia, and France, due to Russian currency depreciation.
• Russian defence spending is forecast to reach its peak of US$62.6 billion in 2015.
• India is forecast to become the third largest defence market by 2020.

NATO expenditure

NATO expenditure is expected to fall in real terms from US$869.6 billion in 2014 to US$837.9 billion by 2020. By the end of the decade, NATO spending will decline from 54.4% of total spend to 48.5%.

Fenella McGerty, senior defence budgets analyst at HIS Aerospace & Defence, said: “By 2019 the alliance will fail to account for the majority of worldwide defence expenditures for the first time in its history having accounted for almost two thirds of global spending as recently as 2010”.

“Spending in Asia Pacific meanwhile is expected to grow to US$547.1 billion by 2020, over 30% of the global total”, said Craig Caffrey, senior defence budgets analyst at IHS Aerospace & Defence.

Asia Pacific drives future defence sector growth

Despite not being immune to the challenges in the global economy, growth in Asian defence expenditure is expected to accelerate from 3.3% in 2014 to 4.8% in 2015. Unlike in the Middle East and North Africa, falling oil prices are expected to have a net positive effect upon economic growth in China, India and Indonesia and will aid government finances.

Caffrey said: “By 2020, the centre of gravity of the global defence spending landscape is expected to have continued its gradual shift away from the developed economies of Western Europe and North America and towards emerging markets, particularly in Asia. In terms of overall growth in each region between 2015 and 2020, Asia Pacific is expected to solidify its role as the key driver of growth in the defence sector”.

By 2020, defence spending in Asia Pacific will exceed that of the US if sequestration continues; at present the US outspends Asia Pacific by US$170 billion. Since Asia Pacific is home to over a quarter of all global defence expenditure, growth in this region is expected to drive the global recovery in military spending.

Middle East and North Africa slump

Expenditure in the Middle East and North Africa has expanded rapidly over the past three years, led by huge budget increases in Algeria, Oman and Saudi Arabia.

“Between 2011 and 2014, regional spending increased by 29.6% in real terms from US$108.5 billion to US$140.2 billion, the largest proportional increase in defence spending of any region over the period”, said Caffrey.

Given the generally higher levels of dependency of the Gulf States on energy revenues, sustained increases in defence expenditure among the GCC states have tended to follow increases in oil prices. Declining returns from the oil sector will temper short term growth in the region. With oil prices dipping below US$65/bbl, a short term fiscal outlook for producers in the Middle East and North Africa region has become significantly more constrained.

US: investment at its lowest in a decade

IHS expects a further US$7.5 billion degradation in the defence budget request through fiscal year (FY) 2019, as the US reduces its troop strength in Afghanistan and faces continuing pressure from sequester reductions likely to restart in FY16.

Guy Eastman, senior defence budgets analyst at HIS Aerospace & Defence, said: “Investment, procurement plus research and development in FY14 will be the lowest value in a decade”.

However, FY15 investment is projected to be even lower at US$158.4 billion. “We expect a decent increase in investment starting in FY16, yet dependent on a potential sequester becoming reality once again”.

UK reclaims third place

Whether the UK or Russian defence budget is budget is bigger depends upon exchange rate fluctuations of the ruble against the dollar in a given year. “The UK defence budget was cut 2% in 2014 but, as the ruble depreciated the UK resumed its position as the world’s third largest defence budget, up from fourth place in 2013”, McGerty said.

Russia defence budget to peak in 2015

The Russian defence budget increased by 17.8% in 2014, the fourth consecutive year of double digit growth, to reach RUB2.5 trillion (US$54.4 billion).

Russian defence spending is forecast to reach its peak of RUB3 trillion (US$62.6 billion) in 2015. The economic repercussions of Moscow’s actions in Ukraine, combined with a precipitous fall in the price of oil over the course of 2014 look set to derail spending plans for 2016 and 2017.

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