Middle East Ramps up Defense Spending

01.15.15
World News /15 Jan 2015
01.15.15

Middle East Ramps up Defense Spending

By Madeleine Moreau for Global Risk Insights

Countries in the Middle East are spending more on defense than ever before. In 2013, four of the top five fastest growing defense markets were in the Middle East, most notably in Saudi Arabia and Oman. Defense spending in the MENA region accounts for 7.8% of worldwide expenditures, up from 5.2% in 2008.

Defense budgets among rich Middle Eastern countries are likely to continue to rise over the next five years. The increasing threat of radical groups such as the Islamic State, along with the sharpening divide between Sunnis and Shias in Iraq, Syria and Lebanon has created a tense security dilemma throughout the region. Nations are likely to continue maintaining defense as a key pillar to foreign policy efforts, even as the price of oil remains low.

Defense Budgets in the Middle East

On Dec. 15, the Stockholm International Peace Research Institute (SIPRI) released its annual report on the international global arms trade entitled “The SIPRI Top 100 Arms-Producing and Military Services Companies.” IHS Jane’s also recently published its own annual defense budgets review for 2014. Both studies show that Middle East defense spending has grown over the past several years and is projected to do so in the long-term.

Spending on defense across the MENA region in 2013 grew by 12.1% to $120.6 billion, making it the fastest-growing region in percentage terms in the world.

According to SIPRI’s list of highest defense spenders in 2013, Saudi Arabia ranked fourth with $67 billion. Turkey was 14th with $19.1 billion, and the United Arab Emirates 15th with $19 billion. Saudi Arabia, Oman, and Bahrain doubled their defense expenditures between 2004 and 2014. Iraq tripled its defense spending, largely due to extremists’ advances across the country.

Defense spending is expected to rocket to $920 billion between 2014 and 2020. However, the compound annual growth rate of the region’s defense spending is projected to grow an estimated 3.48% between 2015 and 2019; the figure for 2010-2014 was 8.45%. Part of this decline is attributed to the fall in oil prices.

Of high demand are ballistic anti-missile systems and new generation warplanes. Military electronics and cyber systems, helicopters for special forces teams and light tactical armored vehicles with weapons systems are also popular amongst Middle East buyers.

Some experts believe that Gulf economies will benefit in other ways from a hike in defense spending, with some $27 billion expected to be injected into its economy via so-called “offset agreements.” These are deals between defense companies and governments to help benefit a country’s economy, such as agreeing to use local suppliers to build equipment.

Impact of Low Oil Prices

Recent low oil prices have taken a toll on Middle East economies, mostly notably Iran and Iraq. Saudi Arabia, the UAE, and other Gulf nations as major oil producers are also affected by low prices. However, large surplus funds accumulated in previous years are likely to cushion Gulf budgets.

Though the annual growth rate for the longer-term is expected to be gradual, the market for armament and sophisticated weaponry will remain ripe. War in Iraq, Syria, and Yemen require nations to amp up defenses in light of threats from violent extremists groups. Tensions growing from the regional Sunni-Shia rivalry playing out on the ground in Iraq and parts of Lebanon require the attention and strength of big power players to maintain relevance by exerting soft as well as hard power.

Additionally, low oil prices are unlikely to affect short-term behavior even by losers of low oil prices such as Iran and Iraq. Iran, for example, has proposed a plan to increase defense expenditure by 33.5% despite a weakening economy. Tehran will probably shift from oil revenue to tax money to support such military budget.

Iraq is also likely to continue to spend big on defense, as conflict with ISIS requires robust military support. Defense expenditures for Iraq’s Armed Forces amount to $6.1 billion, or roughly 8% of its GDP.

Overall, the investment future in the global arms market in the Middle East remains bright despite current economic woes. The demand for future arms procurement is made particularly evident in the fact that the International Defence Exhibition and Conference (IDEX) to be held in Dubai on February 22 was sold out by November.

Longer-Term Security Dilemma

The rise in defense spending in the Middle East raises concern over the potential for a regional arms race, which would make an already volatile region more unstable. This has an ultimate effect on prospects for peace in the region, as an arms build up could incite more fear between states, ultimately making them less comfortable to sit down together at the negotiating table.

Looking ahead in 2015, top defense spenders in the Middle East will need to consider these political risks associated with boosting military capabilities. Otherwise the region runs the risk of creating an even more tenuous security dilemma where it may not be so easy to keep the arms race under control.

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