A new report on global defense spending by leading professional services firm Deloitte says that falling oil prices in GCC states could lead to a reining in of defense and security-related purchases.
The Deloitte report, ‘2016 Global Aerospace and Defence Sector Outlook’ says that declining oil prices will not augur well for global defense manufacturers and suppliers, especially those in the United States and Europe. The report notes that in the 2008-09 slowdown triggered by the financial crisis, GCC buyers acted as a counterbalancing force against the tepid conditions in western economies. During the earlier era of high oil prices, the GCC nations with strong cash positions undertook multi-billion dollar defense modernization programs, aimed at equipping their militaries with sophisticated weaponry.
The report points out that, for example, Saudi Arabia spent US$80.8 billion, or 10 percent of its GDP, on defense in 2014, making it among the top five largest defense-spending countries in the world. “However, lower oil prices are likely to affect the cash reserves of these GCC countries and cuts to trim the budget deficits are likely to impact spending on defense going forward,” Deloitte said.
This situation has created challenges for the global defense sector as countries in this region are their major customers. But, the report adds the region may still place new orders on account of the ongoing conflicts in Syria and Yemen, and the need to build-up a military bulwark against potential threats from neighboring Iran.
For instance, last week, Kuwait’s parliament unanimously approved a request by the government for $10 billion in additional funds for military spending during the next 10 years.
Defense Minister Shaikh Khalid Jarrah Al Sabah said the money, which is to be placed in a special fund outside the budget, would be used to purchase new fighter jets, tanks and air defense systems. He said it was time to modernize the army’s weapons since existing ones were bought more than two decades ago.
The funds would be withdrawn from state reserves. The government had earlier requested double the amount but later settled on $10 billion with the promise to include additional funds within the annual budgets when needed and depending on the financial situation, Finance Minister Anas Al Saleh told parliament.
Deloitte also said that the global aerospace and defense sector witnessed a 0.5 percent decline in 2015, contrary to sustained growth in earlier years, albeit on a constantly declining trend.