Brazil Defence & Security Report Q1 2008

In Q407, Defence Minister Nelson Jobim announced that there would be a major increase in Brazil's defence procurement budget - from US$3.6bn this year to US$5.6bn next year. In 2008-2011, total budgeted procurements will be US$10bn higher than they have been previously.

This announcement represents a very important development for Brazil's defence industries and, indeed, for the overall security environment in South America. In particular, it illustrates a change in priorities on the part of the administration of President Luiz Incio Lula da Silva. Previously, Lula's administration - like its predecessors - had not placed a great importance on defence spending. At around 1.5% of GDP, spending has been low by world standards. In part because of the antagonism towards Lula's Partido dos Trabalhadores (PT) of the military regimes that ruled Brazil prior to the mid-1980s, relations between the administration and the armed forces have been cool. Most recently, the military has endured opprobrium because of the mismanagement of Brazil's civil aviation sector, for which it is responsible.

We have revised our projections to take account of the increase in defence spending through the 2008- 2012 forecast period. At this stage, it seems that spending as a percentage of GDP will remain broadly unchanged. However, spending will definitely increase from the current level (about 6%) as a percentage of government spending. We have also assumed that manpower within Brazil's armed services will rise by about 2% annually. Exactly how the additional money is to be spent is something that should become clearer through Q108. Early indications are that the government will revive plans, dating back to 2002, for a nuclear-powered submarine and 12 new jet fighters.

In essence, Lula's administration is taking advantage of a boom in future revenues from the massive Tupi offshore oilfield to lift the combat capability of Brazil's armed forces after years of underinvestment.

Brazil is, therefore, a late entrant to the recent defence spending boom in South America. The governments of Chile and Venezuela have been able to increase defence spending because of burgeoning revenues from copper and oil respectively. Colombia has received substantial military assistance and funding from the US.

To a greater extent than the other countries in the region, Brazil is home to substantial indigenous armaments companies that can participate in the re-equipping of the armed forces. Nelson Jobim has asked the Brazilian Congress to change the rules for military purchases, in order to allow the government to 'develop an industrial defence policy'. It is therefore reasonable to expect that Brazilian companies will be significant beneficiaries of the increased spending. Meanwhile, the Brazilian companies will continue to export - particularly to developing countries who see their products as offering good value for money.

Once the new equipment is actually acquired, Brazil will be significantly better placed than it has been previously to intervene in the event that tensions between Colombia and Venezuela - which continued to mount through Q407 - give rise to outright warfare. Such a conflict would probably spread into Brazilian territory and could produce waves of refugees.

It is far from clear that the new spending will increase the ability of the Brazilian government to enforce the rule of law in the Amazon Basin (where Brazil shares around 12,000km of border with seven other countries), or in the Triple Border region (i.e. where Brazil, Argentina and Paraguay meet). Regardless of developments in relations between Colombia and Venezuela, drug-smuggling, gun-running, bio-piracy, illegal deforestation and environmental destruction by gold mines will be important issues for Brazil.

To the extent that there is little to prevent drugs and guns from entering Brazil from neighbouring countries, the deficiencies of Brazil's security in the Amazon Basin contributes to other problems.

Conflicts between urban gangs remain a problem in a country that is awash with firearms and in which the police and judicial systems are often inefficient and/or corrupt.