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The Philippines’ $35 Billion Military Modernization Plan, Explained

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Pacific Money | Economy | Southeast Asia

The Philippines’ $35 Billion Military Modernization Plan, Explained

Manila is seeking to take a major step forward in the modernization of its armed forces, but current economic conditions are challenging.

The Philippines’ $35 Billion Military Modernization Plan, Explained
Credit: Photo 162663114 © Bumbleedee |

Philippine President Ferdinand Marcos Jr. recently approved a “wish list” of big-ticket military procurements with an estimated value of around $35 billion (2 trillion Philippine pesos), which will be spent over the next ten years. This is part of an ongoing military modernization program that kicked off in 2012, but the need for upgraded defense capabilities has become more acute during Marcos’ presidency as he has taken a tougher stance against China than his predecessor did.

The Philippines has already made some big purchases in recent years, including a $375 million deal for BrahMos cruise missiles from India. They have also signed several big contracts with South Korean shipbuilder Hyundai Heavy Industries, including for a pair of Jose Rizal-class frigates which are already in service, as well as six offshore patrol vessels and two missile corvettes which will be delivered over the next several years. The combined cost of the patrol boats and corvettes is around $1 billion.

Despite this flurry of activity, if the defense modernization program were indeed bumped up to $35 billion over ten years it would represent a substantial increase over current and historical levels. To give some context, defense modernization (which is paid for using a special fund that is legally separate from the Department of National Defense budget) was allocated 40 billion pesos in 2024. That is about $694 million at current exchange rates. In 2023, it got $477 million. So the government would need to ramp up spending by a lot and quickly to meet its goal of spending $35 billion.

The next question is: can the Philippines afford to spend several billion dollars a year modernizing its military? Ten years is a long time and it’s hard to make predictions about the 2030s, but looking at how the 2024 fiscal situation is shaping up the answer right now is probably not.

When the Philippines approved its most recent budget, planners made some basic assumptions about how the economy would develop in 2024. And so far, with almost half of the year behind us, some of those assumptions look like they were a tad optimistic.

Budget planners were expecting the economy to grow by between 6.5 and 7 percent in 2024. It’s not impossible, as growth in the first quarter of 2024 was 5.7 percent, but this target has been repeatedly revised down and it seems likely the final figure might end up around 6 percent. Planners also expected interest rates and borrowing costs to fall, projecting that the yield on a 364-day Treasury bill would be 4 to 5.5 percent in 2024. It’s currently 6 percent.

Slower growth and higher borrowing costs will place a strain on the government’s finances. The 2024 budget projected a fiscal deficit of 5 percent of GDP, which was obviously based on the expectation that, led by the U.S. Federal Reserve, central banks would start easing back on interest rates this year and bring down the cost of borrowing. Now it looks like that isn’t going to happen, with the Fed likely to keep interest rates steady for a while.

What all of this boils down to is that with slower economic growth, a looming deficit, and higher interest rates and borrowing costs than expected, now is not a great time to kick off a big spending spree on military equipment. In particular, it is not a great time for the government to borrow in order to do so.

The flip side is that with China becoming increasingly aggressive with its territorial incursions, can the Philippines afford not to modernize its military right now? Probably not, and the fiscal situation could be much improved in a year or two so modernization plans must forge ahead regardless.

This means the Marcos Jr. government will almost certainly continue to look for big-ticket procurements especially aimed at bolstering its naval and air defense capabilities. France’s Naval Group, fresh off its $2 billion deal with Indonesia, has been trying to sell Scorpene submarines to the Philippines, and the Air Force has been shopping around for fighter jets for a while.

Annual spending somewhere in the range of $1 billion for military modernization would not be unreasonable or unrealistic. But for now, and until macroeconomic conditions improve a little, a $35 billion military wish list might be leaning a little bit more toward the wish side of the ledger.