(MENAFN- Khaleej Times)Global defence spending is in the midst of a historic shift as traditional majors - the United States and Europe - continue to face severe budgetary pressures. Consequently the growth has shifted to Asia and the Middle East and North Africa regions where economic development and unrest in parts of them have spurred a significant increase in defence spending.
According to Stockholm International Peace Research Institute world military expenditure was valued at $1.7 trillion in 2014 and remained flat since 2011 despite a 19 per cent reduction in US defence spending which was largely offset by robust growth in the Asia (15 per cent) and Mena (35 per cent) regions. The US lead the global military rankings accounting for nearly one-third of world military expenditure in 2014 followed by China (11 per cent) Russia (five per cent) and Saudi Arabia and France (four per cent each). Military expenditure in the Mena reached $140.3 billion in 2014 an increase of 54 per cent since 2009 in real terms. Moreover the region recorded the highest military expenditure as percentage of Mena GDP in the past decade almost twice the world average of two per cent. Saudi Arabia and the UAE are the largest markets together spending well over $95.6 billion annually on defence and accounting for more than two-thirds of total regional military expenditure. Other oil-exporting countries such as Qatar Algeria and Oman have also beefed up their defence investment significantly in the past few years. For instance Qatar started a major expansion of its armed forces in 2012 and announced orders for weapons worth $23.9 billion in 2014. With the perceived vacuum caused by lagging US interest in the region there is a growing desire for sovereign defence capabilities across the Mena. The growth of the Mena defence sector will further boost from economic diversification policy of countries like the UAE that plan to develop a domestic manufacturing base and evolve as a regional exporter of high-tech military hardware and an operations and maintenances hub. Naval shipbuilding in the UAE is a clear example of rising intent and capability driven by offsets and local work share. Major platforms acquisitions are high priority for the Mena including prominent programmes such as Saudi Arabia's recapitalisation of its combat aircraft fleet air and missile defence and growth in maritime capabilities. The region has been spending hefty sums on modernisation or acquisition of aircrafts missiles and maritime assets in recent years. During 2009-14 these three categories accounted for about 75 per cent of all conventional weapon purchases with aircraft (45 per cent share) being the most sought-after. The UAE Algeria and Saudi Arabia ranked the highest in terms of aircraft and missile purchases while maritime assets purchases were dominated by the UAE and Morocco. Furthermore with the installation of major platforms the support and logistics tail is expected to be worth billions of dollars and will grow steadily as expensive and complex systems are deployed. According to defence consulting firm Avascent the Mena region is expected to spend over $40 billion in annual operations and maintenances for defence set-up post-2016. From a supplier perspective the Mena market is largely dominated by American and European defence firms. During 2009-14 the US supplied 38 per cent of all conventional weapons bought by the region followed by Russia (20 per cent) the UK (12 per cent) and France (10 per cent). The US leadership position has continued since decades given its strong ties with Saudi Arabia and the UAE the two largest regional buyers. However in the last few years increasing traction for non-US countries especially Russia and China indicates that other bold market movers are on the horizon. From a domestic standpoint the defence sector is still at a nascent stage with only a handful of players. However the directive policies and tighter procurement regulations in countries such as Saudi Arabia and the UAE has augmented the role of offsets in securing defence deals. Consequently offsets and joint ventures are now essential which may propel the domestic sector in the long term. The global defence services sector has been witnessing increased M&A activity in the recent years. According to PricewaterhouseCoopers a total of 53 deals were announced in the global aerospace and defence sector in 2014 pegging a value of over $21.8 billion as compared to 41 deals worth $13.6 billion in 2013. The Mena region however lacks similar interest as defence contractors here are not just smaller in size but are also yet to develop capabilities that make for a compelling investment case. In conclusion Western defence budgets are being steadily trimmed and defence firms will progressively turn to emerging markets in Asia and the Mena for opportunities. The policy decision to include defence offsets and government's focus on developing regional manufacturing and maintenance base will boost the domestic defence industry in the mid-long term. Furthermore the continuous militarisation of the Mena and emergence of non-US countries as prominent defence suppliers could result in new power-dynamics which is likely to dictate foreign policy in the long term. The writer is founder and CEO of Al Masah Capital Management. Views expressed are his own and do not reflect the newspaper's policy.
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