Brazil Defence and Security Report Q3 2008

A boom in prices of agricultural and mineral commodities that Brazil currently produces, and the prospects of a bonanza from the Tupi oil field provide the background for a rapid increase in military spending in Brazil.

The total sum of budgeted procurements during 2008-2011 is scheduled to be US$10bn greater than in previous budgets. Available defence funds to update old infrastructure and equipment will depend on economic growth as a high proportion of the defence budget is scheduled for pensions and personnel, reportedly 80% at the end of 2007. A small, 4% remained for defence investment purposes, at end 2007.

Our current view is that Brazil's defence spending will not actually increase as a percentage of GDP in the coming years, although Defence Minister Jobim has stated that there will be substantial increases.

Defence spending in Brazil is currently around 1.5% of GDP and remains one of the lowest in the world.

Despite this, the announcements made by Jobim since his appointment in July 2007, to substantially increase defence spending, mark an important change for the defence industries of Brazil and the security sector throughout Latin America. The administration of President Lula has not favoured large defence budgets, in keeping with previous Brazilian governments' policies. The relationship between the government and the military has been traditionally tense, as a result of Brazil's period of military rule during the 1980s. This has been no better under Lula's Partido dos Trabalhadores (PT), and interactions between the two remain terse. Brazil has had a long period of under-investment in defence and security resources. However, the country's fairly recent change in direction mirrors the decisions of other South American nations, such as Venezuela, Chile and (to a lesser extent), Columbia, which have also expanded their military capabilities.

Jobim has raised Brazil's defence procurement budget from US$3.6bn in 2008 to US$5.6bn in 2009. His talks with France and Russia are also significant. The development of a maintenance complex to service Russian military aircraft is one of Jobim's plans under discussion with Russian authorities. Brazil and France continue to decide the terms of an agreement for purchase of a diesel-electric Scorpene class submarine and attendant technology transfer. These discussions are also down to Jobim and his objectives for change. The possible resumption of Brazil's historic plans for developing a nuclear submarine has also been raised by Jobim. Whilst not confirmed as a development project, the Scorpene could be a model used for the project. In another development, Venezuelan President Hugo Chavez may be forced to service his aircraft fleet in Brazil, a development which could be very unsettling for Venezuela.

Previously the Chavez administration bought 24 Sukhoi Su-30MK2s and 33 helicopters from Russia, however it was not able to secure a transfer agreement for technology Whilst BMI projections doubt that increased defence spending during 2008-2001 will lift defence as a proportion of GDP, we acknowledge that spending will certainly increase as a percentage of government spending, from the current level of about 6%. In addition BMI has assumed that the manpower of Brazil's armed services will increase by around 2% per annum. The 2008 intake of military personnel is predicted to rise by 100,000.

Brazil's economic outlook in 2008 will be impacted by the softening of more conducive conditions in 2006 and 2007. The inflows of foreign direct investment reached a record level of US$37.4bn in 2007.

These funds have been essential to economic growth and they are expected to drop off in 2008. However Brazil has a solid position to withstand such challenges. Our view for GDP growth in 2008 remains a robust 4.7%. GDP growth for 2007 is estimated to have been 5%. We see this decrease as owing mainly to the importance of domestic demand for the next phase of Brazil's expansion, rather than external factors.

The plans by government to boost spending on defence cannot be mentioned without noting the discovery of the extensive Tupi offshore oilfield. The oilfield is massive and should give a boost of more than 50% to Brazil's oil reserves. Given the tightening supply of oil worldwide, the long-term revenue potential of the Tupi reserves for Brazil's government cannot be underestimated. The opportunity presented by this development has been used by Lula's administration to increase defence spending.

Brazil has a more substantial and diverse offering of indigenous armaments companies able to provide equipment to the armed forces. The Brazilian Congress has been asked to change the rules for military purchases by Defence Minister Jobim, thereby permitting the government to 'develop an industrial defence policy.' As such Brazilian companies will not benefit substantially from the increased defence budget. For example the construction of the weaponry, hull, and cybernetic stuffing for the possible nuclear submarine project would be in Brazil, according to the Defence Ministry. Meanwhile, developing countries will continue to take imports from the Brazilian companies as their products carry a reputation of being good value for money.

General elections are to be held in 2010 and municipal elections will take place this October. A reliance on President Lula's personal popularity by his Partido dos Trabalhadores (PT) may continue to undermine prospective presidential candidates for the party. This is in evidence at present as tensions are increasing between the PT and Brazil's main opposition parties leading up to the municipal elections.

Internal security problems continue to be a concern for Brazil, especially the Amazon Basin are (where Brazil shares around 12,000km of border with seven other countries), over which the government has a weak hold over the rule of law, or in the Triple Border region (i.e. where Brazil, Argentina and Paraguay meet). The prevalence of drug-smuggling, gun-running, bio-piracy, illegal deforestation and environmental destruction by gold mines will remain key concerns for Brazil, whatever the status of relations between Venezuela and Colombia. As drugs and guns enter Brazil through the borders of various countries, urban gang violence is supported. The problem is compounded in a legal environment where the police and judicial systems are commonly inefficient and/or corrupt.