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Defence Budgets

Date Posted: 26-Mar-2008

Jane's Defence Budgets - Brazil

Brazil Defence Budget

Summary

2008
Total Defence Spending (USD billions) 24.62
Total Defence Spending (BRL billions) 42.73
Total Defence Spending (% of GDP) 1.54
Total Defence Spending per member of Armed Forces USD66,938

Brazil is easily the South American region's top military spender with a defence budget more than double that of its nearest competitor Colombia. Despite
this, Brazilian expenditure only just keeps pace with the expansion of the overall economy and it remains low in proportion to Brazil's economic wealth and
regional standing. This is especially true if funds that are allocated to the Ministry of Defence (MoD) but spent on social security are excluded as they make
up almost half of total expenditure. The prospects for spending increases however are good, with Brazil's solid economic footing and recent oil finds
indicating that there is room for expansion if desired.

Total defence spending

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 8.24 8.55 9.61 13.33 16.62 20.71 24.62 26.46 28.70
BRL billions n/a 22.80 25.80 28.07 32.27 36.08 40.12 42.73 45.92 49.82
Note:

USD conversion using annualised Interbank rate.

Defence spending trends

Despite its vast geography and economic power, successive Brazilian governments have declined to spend heavily on the military, keeping expenditure to
around 1.5 per cent of GDP.

Historically this has been due to a deliberate policy of restricting military funding as a way of maintaining civilian control over the armed forces - a reaction to
the end of military dictatorship in 1985 - as well as a long history of territorial integrity.

Around 50 per cent of the budget in 2007 and 2008 was directed towards social security payments, with the result that actual military expenditure is around
half of the published defence budget. The overwhelming majority of expenditure has been on personnel-related areas which, if social security payments are
included, constitute 75 per cent of the total MoD budget.

There are some countervailing trends and the rise of Venezuela's military power on the back of its oil deposits is likely to increase pressure to raise
spending. The discovery in late 2007 of another major oil field (with an estimated yield of up to 8 billion barrels) may also spur additional investment in the
armed forces as will the increasingly poor condition of the three services inventories. The MoD has been working towards an increased level of funding with
a new National Strategic Plan (Plano Estrategico Nacional de Defesa - PEND), to be completed in September 2008.

The armed forces received a boost in the 2008 budget with the Lula government announcing that it would inject modernisation funds to pay for new fighter
aircraft, the development of a new transport aircraft, and the acceleration of the nuclear submarine programme. Brazil and France have been pursuing
technology deals with France promising technology transfer as part of its F-X2 bid with Rafale and nuclear technology related to the submarine programme.

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Jane's Defence Forecasts - Military Aircraft Programmes Page 2 of 3
In all, the government announced that the armed forces would receive around USD5 billion in the 2008 federal budget for weapons acquisition and
upgrading, an almost three-fold increase from 2007, with the air force to receive around 40 per cent and the army and navy around 30 per cent each. A 14
per cent increase in armed forces salaries was also promised. Subsequent difficulties in the budget approval process, with Congress refusing to renew a tax
on financial transactions, thereby creating a shortfall of USD20 billion in budgeted tax revenues for 2008, meant these may have to be postponed, however
the final status of the changes is unclear.

Military Aid

Brazil is not a recipient of US Foreign Military Funding assistance.

Defence spending as a percentage of GDP

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percentage n/a 1.54 1.52 1.45 1.50 1.55 1.57 1.54 1.52 1.52

Functional spending

Defence Procurement

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 0.58 0.29 0.52 0.65 0.61 0.75 0.77 0.83 0.88
BRL billions n/a 1.69 0.88 1.56 1.58 1.30 1.61 1.65 1.77 1.89
Note:

USD conversion using annualised Interbank rate.

The dearth of investment funds available to Brazil’

s armed forces is well documented, not least following the decision in 2004 to cancel the air force’
s
flagship F-X fighter aircraft programme which was replaced with the purchase of second hand aircraft from France. However, since then the MoD has
embarked on new initiatives to help finance much needed procurement programmes. In 2005, a USD720 million loan from a consortium of banks enabled
the purchase of 12 C-295 transport aircraft from EADS CASA and the upgrade of eight P-3 maritime patrol aircraft, whilst an emergency supplement of
BRL600 million from the government helped procure new torpedos, fuel and lubricants and initial instalments on AMX attack aircraft, Black Hawk helicopters
and Super Tucano aircraft. The following year, Brazil’
s economic planning ministry the Foreign Financing Commission (Cofiex) approved a USD1.1 billion
loan from various lending agencies to help finance the construction of a new submarine as well as the upgrade of four others. Major increases in investment
expenditure were promised in 2007, however the extent to which these will be realised is not yet clear.

In December 2007 Jane's reported that the major concern was modernisation with Brazilian Air Force (Fora Aerea Brasileira - FAB) Commander General
Juniti Saito telling local media outlets that the winner of Brazil's F-X2 fighter contest would be announced in 2008. Brazil's Planning Ministry has established
a BRL2.2 billion (USD1.2 billion) fund to invest in 36 fighters to meet the requirement with two aircraft thought to be in contention: the Dassault Rafale and
Sukhoi Su-35. As a compromise dictated by economic considerations, the FAB could buy 12 Mirage 2000Cs from French Air Force stocks to equip a new air
defence squadron in addition to 24 new Rafale fighters for the F-X2 programme.

Personnel Spending

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 7.31 7.03 7.43 10.22 12.70 15.75 17.95 18.52 20.09
BRL billions n/a 21.33 21.11 22.61 24.85 27.19 30.50 31.15 32.14 34.87
Note:

USD conversion using annualised Interbank rate.

Since the mid-1990s defence expenditure in Brazil has fluctuated between 1.8 per cent and 2.1 per cent of GDP, but has been insufficient to implement
many modernisation plans. Indeed, since 2000 the situation has deteriorated as an increasing proportion of the budget has been allocated to personnel,
pensions and operational costs, leaving an inadequate sum for investment in new equipment. Without a reduction in the numbers serving in the armed forces
it will be difficult to reverse this trend. Pension contributions in particular are becoming an increasing problem. In 2000, social security contributions
amounted to 42 per cent of the defence budget but by 2007 had risen to 48 per cent.

The rising burden of retirement funding on the defence budget is receiving closer scrutiny. It is probable that Brazilian military retirees and their dependants
receive the best benefits in the region. Not only does the ex-serviceman receive a healthy pension but their families are also compensated for the
inconvenience of military style life and the difficulty that imposes on trying to establish a career themselves. Given the general trend established by President
Lula to investigate the entire state pensions system, it would benefit serving military personnel if adjustments to the current military pensions system were
initiated.

Operational and Maintenance Expenditure

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 1.20 1.10 1.31 2.29 2.15 2.24 3.39 3.70 4.02
BRL billions n/a 3.50 3.29 4.00 5.57 4.60 4.35 5.88 6.43 6.97

Note:
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Jane's Defence Forecasts - Military Aircraft Programmes Page 3 of 3
USD conversion using annualised Interbank rate.

The creation of the new Special Forces Brigade together with increasing military deployment in major cities and at the border, has led to higher fuel and
other operational costs. In addition, much of Brazil’
s military equipment inventory is now at the age when it requires more frequent and costly maintenance,
much of which is simply not being carried out due to lack of funds. In 2003 it was estimated that around 70 per cent of the country’
s 680 aircraft were
grounded due to a lack of funds to buy either fuel or spare parts.

Service Spending

Army Spending

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 4.36 3.93 4.17 5.80 7.15 8.81 10.44 11.16 12.11
BRL billions n/a 12.73 11.80 12.69 14.09 15.30 17.07 18.13 19.38 21.02
Note:

USD conversion using annualised Interbank rate.

Air Force Spending

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 2.17 1.92 2.17 3.37 3.54 4.66 5.88 6.35 7.03
BRL billions n/a 6.33 5.78 6.60 8.18 7.59 9.03 10.21 11.02 12.21
Note:

USD conversion using annualised Interbank rate.

Navy Spending

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD billions n/a 2.32 2.07 2.10 2.96 4.00 4.95 5.75 6.08 6.60
BRL billions n/a 6.76 6.23 6.40 7.20 8.57 9.59 9.98 10.56 11.46
Note:

USD conversion using annualised Interbank rate.

Economic trends

Real GDP Growth (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percentage n/a 1.9 0.5 5.2 2.6 3.5 3.3 3.6 3.6 3.7

Despite coming to power on the back of the populist vote, President Luiz Ignácio da Lula’ s government has adopted an austere fiscal policy. While pledging
to reform the tax and social security sector as well as regional state funding, his economic team has impressed observers by sticking to the fiscal framework
outlined by the IMF as part of their emergency loan packages initiated in 2002 and 2003. Indeed, in 2005 the IMF praised Brazil’ s “exemplary fiscal policy”as
a model for the region as a whole.

Under the terms of the “Brazil for All”Plan 2004-2007, growth had been forecast to increase to a trend level of 5 per cent a year, led by investment and
exports rather than private consumption, and the government’ s fiscal balance was forecast to remain in surplus. Whilst the budget surplus has been
maintained, growth has failed to match expectations and the IMF forecasts that it will also fail to reach the target in coming years. The plan also outlined a
modest fall in overall government spending as a percentage of GDP and that priority would be given to social and infrastructure programmes. During the
period, defence spending is modestly higher although, despite a desperate need, there is little scope for significant growth, indeed there is every likelihood
that, at best, spending will match growth in the economy as a whole.

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