A decision to modernise armed forces, participation in overseas peacekeeping missions in Haiti with the UN and ongoing disputes with the UK over the sovereignty of the Falkland Islands are all factors that continue to drive Argentina’s defence expenditure; however, near-constant revisions by the government about budget allocations, and the cancellation and postponement of some defence projects pose a major challenge to an otherwise promising industry.
The Argentine defence budget has recorded a strong compound annual growth rate (CAGR) since 2006, reaching approximately US$2.6bn in 2010. According ICD research’s ‘The Argentine Defence Industry – Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015’ report, the country’s defence budget is expected to record significant growth, to reach approximately $5.5bn by 2015.
Elections in October 2011 could bring further revisions to the budget, but early indications suggest a victory for current President Cristina Fernandez de Kirchner, a proponent of modernisation. The president has also been vocally outspoken about the sovereignty of the Falklands, or Las Malvinas, and has criticised the UK’s reaffirmed stance of non-negotiation.
Whether the Falklands issue will be reignited once again remains to be seen, renewed calls for discussion from the US has provoked debate, and the presence of large proven oil reserves are likely to establish the islands and subsequently the nation’s military capabilities as a hot topic in the run-up to elections.
Argentine defence budget
The Argentine army receives the highest allocation of the total defence budget, which is expected to increase until 2015. The budget allocated to the country’s air force will marginally decline, while the allocation for naval forces is expected to increase. The remaining budget is allocated to the Ministry of Defence and joint forces responsible for defence administration, planning, execution and development of the domestic defence industry.
In addition, Argentina’s homeland security expenditure is also expected to increase to reach $3.7bn by 2015.
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The country’s homeland security budget is primarily driven by social unrest fuelled by rising poverty, illegal immigration and increasing organised crime.
Further expenditure will be maintained by the Ministry of Security, which created in 2011 after the failure of domestic forces to control civil disturbances in December 2010.
The country’s navy budget accounted for an average of 25.3% of the defence budget during the review period, which is expected to marginally increase to an average of 25.5% until 2015. The army is expected to cumulatively spend $8.6bn during this period while air force expenditure, estimated at $662.3m in 2011, is expected to grow at a CAGR of 19.81% to reach $1364.9m by 2015.
Defence imports to increase
Argentina’s defence imports peaked in 2007 before declining in subsequent years due to economic limitations, which forced the country’s government to postpone defence modernisation plans. During the period until 2015, imports are expected to increase with the resumption of modernisation plans.
The US accounts for the majority of imports, with other countries such as Spain, Brazil and Austria exporting equipment to the Argentine armed forces.
The US is expected to continue to dominate the Argentine defence market until 2015 and Russia will likely enter the market through the supply of transport helicopters. Argentina is expected to procure patrol vessels, nuclear submarines, transport ships, multipurpose vehicles, helicopters, communication systems and fighter aircraft during this time.
The Argentine Ministry of Defence is expected to upgrade its navy with new transport ships and is currently building four patrol vessels at the Tandanor-Alte Storni shipyard in Argentina under a multiyear $600m contract.
The government also plans to procure nuclear submarines during the forecast period. In February 2008, government negotiations to jointly develop nuclear reactors with Brazil failed; however, Argentina has begun to develop its own reactors and plans to install them in TR1700 submarines by 2015.
The Argentine air force, which had been operating obsolete equipment, is expected to procure new advanced fighter aircraft, helicopters and transport aircraft, and plans to upgrade the army’s airlift capabilities. The country has joined the Brazilian KC-390 programme for the development of a medium lift transport aircraft, with Brazilian firm Embraer as the primary contractor.
The government will also upgrade engines on its Pucara and Pampa fighter aircraft, and is in the process of procuring five Bell 206 helicopters and five Mi17 helicopters from Russia.
Modernisation and repairs of its helicopter fleet is also under progress as the government plans to refurbish its Super Puma helicopters and upgrade its Huey-II helicopters.
Argentina is expected to procure advanced multipurpose vehicles for the army, with an allocation of ARS17m ($4.4m) in 2010 for the procurement of 50 units. In addition, the army’s C3I systems are expected to be upgraded. The communication systems will allow for interoperability with NATO forces, enhancing the joint operations capability of Argentine forces.
Offsets, technology transfers and partnerships
Argentina requires 100% offsets for defence procurements. The country is in the process of reviving its domestic defence industry and therefore encourages technology transfers, partnerships and research and development (R&D) as offsets. Foreign defence companies are free to invest in the Argentine defence sector, do not need to attain any prior approval from the government for investment and do not face restrictions on profit repatriation, resulting in an atmosphere conducive to foreign investment.
Market entry opportunities
Defence companies can enter the Argentine defence industry through Foreign Military Sales, which involve direct government-to-government transactions, and foreign companies can also establish partnerships and use technology transfers. The country’s foreign investment policy encourages the establishment of subsidiaries, which provides further entry opportunities.
The domestic defence industry is entirely dependent on its government for sales and therefore defence budget fluctuations lead to uncertainty among domestic defence suppliers.
Dependence on government contracts
Argentina’s domestic defence industry supplies the majority of its production to the government and is therefore dependent on it for its order book. The defence budget fluctuates as the government faces varying financial constraints, affecting supplier planning and resource management.
For example, in 2007 a military funding programme established to increase the defence budget by $200m a year until 2013 was not implemented for budgetary reasons. The government also postponed modernisation plans, such as the replacement of the Mirage III fighter in 2009 due to economic constraints.
Such uncertainty in the defence budget has a negative impact on the domestic defence industry and may limit its future expansion potential.
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