Brazil's Defense Spending Cut the Largest in a Decade

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With South America’s total defense spend equivalent to roughly 1.2% of the region’s gross domestic product (GDP), the lingering economic crisis plaguing the region will continue to force budget cuts through 2020. IHS Inc. (NYSE: IHS), the leading global source of critical information and insight estimates that between 2015 and 2020, South America’s cumulative defense spend will be USD$238 billion, or 11% lower than the previous five years, when spending totaled USD$269 billion.

“Several factors have contributed to the regional economic crisis which has forced significant contraction in South American defense spending. Slowing growth and a changing economic model in China has led to a large decline in prices fetched by many of the commodities exported by South American economies,” said Andrew MacDonald, senior analyst, defense industry and budgets for IHS Jane’s. “Increases in oil supply and sluggish global growth also produced a massive fall in oil prices, which further reduced revenue generated by several states in the region.  This environment has hit states with less diversified economies hardest, but has also driven poorly managed economies such as Brazil’s from slowdown into crisis and Venezuela’s to near total collapse.”

While recent years’ declines in South American defense budgets have been driven by economic necessity, a longer-term downward trend exists as well. Despite that trend, the region’s defense expenditure has always been low in relation to the size of its economy, especially in contrast to North America, the Middle East and Russia.

Brazil

Brazil is by far the most important national market; with its $19.5 billion defense budget accounting for 47.5% of the regions spend in 2016. In monetary terms the country’s 6.8% cut is significant as it represents a decline of almost $1.5 billion from 2015’s budget in real terms. Falling revenue from iron ore and food product exports, as well as slowing global growth, tipped Brazil from slowdown into recession in 2015, and the country’s economic situation worsened in 2016. While procurement spending, greatly restricted by large personnel costs, fell by over $700 million in 2015, it is expected to recover relatively strongly despite a continuing decline in the total budget, largely through efforts to cut costs in other spending areas.

Colombia

Colombia is somewhat different to other countries in the region in that falling defense spending has not been forced by worsening economic conditions. Despite avoiding a recession, economic growth has slowed to an estimated 2.7% in 2016. This is likely to have reinforced a downward trend in military budgets, rather than driven it. “It’s one of the few countries which has suffered real military threats, and spending as a percentage of GDP is as a result the highest in the region.  However, it has fallen since peaking at 2.2% of GDP in 2013 to just 1.8% today,” said MacDonald.

Argentina

Argentina has been the country that has defied South America’s regional trends – at least for now. The country’s effective budget stagnation makes it the most robust of the region’s large budgets over the past five years, although this is a steep decline from 2015’s double-digit growth. Between 2010 and 2015 Argentina’s defense budget grew by nearly $1.4 billion in real terms, a 43.6% growth, while GDP grew only 14.7% in the same period.

Chile

In Chile, economic slowdown has come alongside falling copper prices, which directly finance military procurement through the Copper Reserve Law. With the steady decline in copper prices since 2011, the country’s defense budget has mirrored this drop. “However, allegations of fraudulent use of this funding have hastened long-pursued reform to this system, and greater transparency, as well as recovery in copper prices, is expected to help Chile’s defense spending return to growth,” said MacDonald.

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