Press Release

Contact: Dan Darling, Middle East Defense Analyst
Phone: (203) 426-0800
Fax: (203) 426-4262
Web site: www.forecastinternational.com
E-mail: daniel.darling@forecast1.com
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FOR IMMEDIATE RELEASE

Military Modernization Efforts Spur Further Middle East Defense Growth

NEWTOWN, Conn. [January 17, 2011] — The Middle East defense spending binge is set to grow further in coming years as Gulf Arab nations embark on military modernization programs. In its annual Middle East market analysis, Forecast International projects that defense investment across the region will expand by 14 percent over the next five years. The region's continuation as a leading global area for military expenditure is being spurred by Saudi Arabia and the United Arab Emirates.

Medium-term regional defense growth will stem from not only the two core Gulf Cooperation Council (GCC) members, but also Iraq. Faced with internal security challenges, plus the need to solidify its borders, Baghdad will invest an average of $12.5 billion annually through 2015 toward advancing development of the Iraqi Security Forces (ISF). The principal thrust of Iraqi investment going forward will be to bolster the Iraqi Air Force (IQAF). The IQAF plans to field 500 fixed- and rotary-wing aircraft by 2020; its pressing needs include advanced jet trainers and combat aircraft.

The impending exodus of U.S. forces from Iraq combined with a broad range of equipment requirements means that the pace of fitting-out the ISF will have to accelerate if the central government is to capably provide security. Such progress may be hindered if Pentagon investment in the Iraqi Security Forces Fund dries up due to Washington's own budgetary pressures at home. Since 2005, the U.S. Department of Defense has allocated about $19.1 billion to the fund. As a result of U.S. financial largesse, the bulk of Iraqi equipment orders flow through the Pentagon's government-to-government Foreign Military Sales (FMS) channel, ensuring U.S. defense companies are the beneficiaries.

"Although the Iraqi government would like to diversify its supply chain, the U.S. remains its principal provider of military equipment," says Forecast Middle East Defense Analyst Dan Darling. "So long as U.S. funding toward the development of the new Iraqi Security Forces continues, this is unlikely to change. Should Washington turn off the tap, others will surely step into the void, including France, Russia and suppliers from Eastern Europe."

While Iraq provides a robust market opportunity due to the ongoing ISF rebuilding process, the scale of investment in the Gulf region is higher. Spearheaded by a $60 billion package of approved FMS agreements, Saudi Arabia aims to upgrade its air fleet with new and refurbished F-15 jet fighters and new helicopters, including up to 70 Boeing AH-64D Apaches, 36 Boeing AH-6i Little Birds, and 72 Sikorsky UH-60M Black Hawks. In addition, there is mention of a major Royal Saudi Navy upgrade program also being pursued through Pentagon FMS channels that could be worth up to $30 billion.

Mirroring the Saudi efforts, the UAE is also undertaking a modernization of its Air Force. This modernization includes an approved FMS agreement for the purchase of 60 AH-64D Apache helicopters. The UAE is also in the process of considering successors for its fleet of Mirage 2000 jet fighters in what may ultimately prove to be a 60-unit buy worth up to $10 billion. Additional areas that the UAE may seek to upgrade include littoral protection and air defense.

Concrete defense cooperation among the six GCC members continues to be elusive, leaving each nation to pursue its needs independently. Thus the UAE, Kuwait and possibly Qatar are each contemplating a buy of the Dassault Rafale combat aircraft, while the Saudis and Oman seek U.S.-built solutions to their jet fighter needs. But despite the lack of progress within the GCC in terms of a common procurement approach, the one constant is that at the national level defense investment remains robust, generally representing 10-20 percent of total state expenditure annually. For 2010 combined, GCC defense/security investment was $68.3 billion. Forecast International expects the total to increase to $73.4 billion in 2011 and continue growing to $82.5 billion by 2015.

"Fearing Iran's regional strength, the GCC states continue to seek a distinct qualitative military-technological edge over Tehran," Darling says. "But Iran's manpower and missile strengths camouflage some serious weaknesses, such as command-and-control shortcomings, a combat aircraft fleet falling into disrepair, and an armored vehicle inventory of questionable capability. Other than its long-range missiles, Iran is limited for now in its ability to project conventional military power across the Gulf. In other words, some GCC countries may be susceptible to over-buying for a certain kind of threat that is not readily apparent."

Though it may lack the modern material seen in most Tier 1 militaries, this is not indicative of reluctance by Iran to improve and expand its weaponry or invest in defense. Tehran spends around $9.3-9.5 billion annually, a trend Forecast expects will continue in the near term. This level of expenditure places it among the five highest defense spenders in the region, behind Saudi Arabia, Israel, Iraq and the UAE. Much of Iran's defense investment goes toward personnel costs and missile programs, and to upgrade existing platforms and develop indigenous hardware.

Because of the myriad threats it faces, Israel continues to place a premium on military funding. Aided by U.S. Foreign Military Financing (FMF) of $3 billion annually, the country continues to invest in modern jet fighters, its multi-layered anti-missile air defense network, unmanned aerial vehicles, the Namer heavy infantry fighting vehicle, and a slew of other projects. Impending purchases include a new advanced jet trainer and two large missile corvettes. Egypt is also a beneficiary of generous U.S. FMF allotments, receiving about $1.3 billion per year. Forecast expects Egyptian defense spending over the next five years to reach around $16 billion, with Israeli spending coming to over $64 billion during the same timeframe.

"The major defense markets of the Middle East continue to be dominated by the U.S.," Darling says. "Russia has footholds in Syria and Yemen and is making efforts to help equip the Lebanese Armed Forces. But its regional market share pales in comparison to that of the U.S. With President Medvedev signing a decree back in September banning the supply of a variety of Russian armaments to Iran, the other major market for which Moscow was the principal supplier is now likely to be ceded to China."

Forecast International, Inc. (www.forecastinternational.com) is a leading provider of Market Intelligence and Analysis in the areas of aerospace, defense, power systems and military electronics. Based in Newtown, Conn., USA, Forecast International specializes in long-range industry forecasts and market assessments used by strategic planners, marketing professionals, military organizations, and governments worldwide. To arrange an interview with Forecast International’s editors, please contact Ray Peterson, Vice President, Research & Editorial Services (203)-426-0800, ray.peterson@forecast1.com. Proprietary Special Research is also available. Contact Jonathan Watson, Managing Director, The Forecast Consulting Group (j.watson@forecast1.com).