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Oil Driving Long-Term Growth Prospects in African Arms Market
by Forecast International
Saturday Dec 8th, 2007 5:37 PM
Driven by changing geopolitical environments and enabled by hydrocarbon-derived wealth, select African nations are attempting to recapitalize their military and security forces in a way that potentially creates major opportunities for western defense enterprises.
NEWTOWN, Conn. [December 3, 2007] – The African arms market, traditionally recognized for its low value and opaque business environment, may represent tomorrow's growth market for the global defense industry, according to Forecast International's "Africa Market Overview" report. Driven by changing geopolitical environments and enabled by hydrocarbon-derived wealth, select African nations are attempting to recapitalize their military and security forces in a way that potentially creates major opportunities for western defense enterprises.

Forecast International expects African defense spending as a whole to increase 3.5 percent year-on-year from $13.9 billion in 2007 to over $15.9 billion in 2011. As less than 20 percent of defense spending is allocated for procurement, the spending increase translates into a market value of $2.8 to $3.2 billion over the four year period.

However, the relatively unimpressive top line trend in the African market hides the latent opportunities presented on a nation-by-nation basis contends Matthew Ritchie, author of the report. "The African arms market is currently a fraction of the value of any other regional market, but looking at the confluence of burgeoning security requirements and vast oil and [natural] gas reserves in the context of high energy prices and it becomes readily apparent that there is a collection of Africa nations demonstrating procurement characteristics reminiscent of the Middle East three decades ago."

Algeria, Libya, and Nigeria represent three such emerging arms markets. In 2007, aggregate defense spending in these nations totaled $4.98 billion; an 11 percent increase over the previous year in contrast, to the five percent annual growth throughout the rest of Africa.

Between 2007 and 2011, Algerian defense expenditures are predicted to increase 14 percent ($420 million), Libyan spending is set to increase 91 percent ($572 million), and Nigerian defense outlays will increase by 13 percent ($118 million).

"The expansion of defense budgets in Algeria, Libya, and Nigeria is driven by a series of push and pull factors," notes Ritchie. "On the pull side, the combination of high energy prices and expanding production provides the means to finance growing defense expenditures; on the push side, these nations' increasing reliance on energy revenues is forcing them to acquire the military capabilities needed to protect their economic mainstay."

In 2007, these emerging markets accounted for roughly 70 percent of Africa's oil and natural gas production and over 35 percent of its defense spending.

Consequently, the relationship between high-energy prices and increased defense spending has bolstered arms acquisitions. Since 2005, Algeria has signed defense contracts worth $8 billion, a majority of which is linked to the $7.5 billion contract with Russia in 2006; Libya, still re-emerging from two decades of arms embargos, has signed defense contracts estimated at $750 million; and Nigeria, despite domestic political instability, has signed a myriad of defense contracts valued at over $1 billion.

Of greater interest is the fact that these procurement funds are increasingly devoted to acquiring U.S. and European arms: between 1999-2002 and 2003-2006, U.S. and European share of the total value of arms transfer agreements with Africa increased from 34 to 37 percent.

“Modernizing entire force structures from power projection assets to surveillance and communication networks is the focus of procurement programs in these emerging markets. Recent acquisition and requests-for-purchase have targeted fighter and strike aircraft, advanced trainers and military transports, attack and utility helicopters, littoral patrol vessels, modern air defense systems, and integrated tactical communications networks," says Ritchie.

Looking forward, the energy wealth that is central to these arms acquisition programs is expected to increase. According to data from the U.S. Energy Information Administration, the combined oil and natural gas production of Algeria, Libya, and Nigeria is projected to grow by 50 percent over the next decade. Likewise, Forecast International's defense spending outlook for Africa indicates that expenditures in these three energy-rich markets will account for over 55 percent of the $2.2 billion in defense spending growth to occur in Africa over the same period.

http://www.forecastinternational.com/press/release.cfm?article=134

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