Brazil Defence and Security Report Q1 2009

Brazil has embarked on a major programme to upgrade its armed forces, planning to buy and build equipment to defend offshore oil riches and a porous border in the Amazon jungle. Brazilian President Luiz Inacio Lula da Silva has pushed for an increase of more than 50% in Brazilian defence spending through to 2010. Brazil has previously experienced long periods of underinvestment in defence and security, and recent moves to change that mirror similar decisions taken by other countries in the region, such as Venezuela, Chile and (to a lesser extent) Colombia. Brazil’s defence minister, Nelson Jobim, has raised the national defence procurement budget from US$3.6bn in 2008 to US$5.6bn in 2009. In July 2008, Brazil signed an agreement with France for Eurocopter to build helicopters as part of a broader strategic defence alliance. Brazil and France continue to decide the terms of an agreement for purchase of a diesel-electric Scorpène class submarine and attendant technology transfer.

However, since the Brazilian president and defence minister have announced these massive targeted increases in defence spending, the global economic outlook has changed markedly. The price of oil has fallen by two-thirds from its peak and the prices of other commodities of which Brazil is a major exporter have also declined. As such, we expect Brazil’s ambitious spending programme may be reduced. It remains to be seen to what extent Brazil is already committed to the spending programme and the timeframe available for any reductions. Clearly, Brazil has significant reserves to maintain increased spending, but may curtail the spending given the drastic change in the global economic outlook.

Another recent change is that Brazil has been the driving force behind a proposed new South American defence grouping that threatens to exclude the US from regional military planning at a time of growing tensions between Washington and leftist Venezuelan President Hugo Chávez. The creation of a South American Security Council – which would include oil-rich Venezuela, Chile and Argentina – was proposed by Lula at a meeting of 11 Latin American countries held in Brazil’s capital, Brasilia, in May 2008. Brazil has obtained backing from most other South American governments for the joint defence proposal. Brazil, which has maintained friendly relations with Washington and Caracas, has said that any Unión de Naciones Sudamericanas (UNASUR) security alliance would be purely defensive and mainly aimed at standardising military procurement and training. However, the proposals have not been short on controversy and many interpreted the recent deployment of the US Navy’s 4th Fleet, which had not operated as a separate fleet since shortly after the end of the second world war, to waters off Central and South America as a response to the proposals. Some Brazilian senators have been particularly troubled by rumours that the manoeuvres were allegedly prompted by the discovery of oil fields 300km off the coast.

Another change is that Minister of Strategic Affairs Roberto Mangabeira Unger announced in September that in order to formulate the national defence strategy, the government is working through an interministerial commission to address a reorganisation of the armed forces based on three pillars. According to the minister for strategic affairs, the commission’s role is to debate ways to rebuild the armed forces to function ‘in times of peace or war’, to reorganise the national defence industry with an emphasis on building a nuclear submarine and, furthermore, to debate ‘the future of mandatory military service’.

While the economy is set to post another year of robust economic growth in 2008, we are revising down our 2009 and 2010 real GDP growth forecasts to 2.3% and 2.6%, respectively. Our view is based on lower global demand for commodities and prohibitive lending conditions for businesses and consumers alike. Our downward revision to Chinese real GDP growth in 2009 is a key factor.

The resilience of Brazil’s economy, particularly domestic consumption, continues to surprise. Consumers and investors defied jittery financial markets and high inflation during Q308, in large part due to still climbing lending growth levels. Higher consumption pushed real GDP growth up to 6.8% year-on-year (y-o-y), from 6.2% in Q208, bringing the average real GDP growth rate during the first three quarters of the year to 6.4%. While we still expect there was a moderation in growth in Q408, full-year real GDP growth looks like overshooting our 5.2% forecast. We therefore revise up our 2008 projection to 5.7%.