Philippines Defence and Security Report Q1 2013

BMI's Philippines Defence & Security Report Q1 2013 examines the country's strategic position in theAsia Pacific region and the wider world. It provides an overview of the contemporary geopoliticalchallenges facing the country and the challenges it may face in the future.

The report examines the trends occurring in the country's current and future defence procurement and theorder of battle across its armed forces. Its general conclusion is that tensions between the Philippines andChina have reached a serious level and that the Association of Southeast Asian Nations (ASEAN) -which is deeply conflicted over how to handle China - will not be much help to the Philippines as it looksto protect its interests against what it regards as Chinese aggression.

As a result of the security threat from China, the modernisation of the long-neglected Armed Forces ofthe Philippines (AFP) has become a major political priority for Manila. As well as increasing the 2013defence budget, the government has earmarked additional procurement funds and has begun investingheavily in new capabilities for its air force and navy. By also engaging in defence diplomacy with a wholerange of allies - especially those who are also wary of China - Manila is also making good progress inprocuring second-hand military equipment often on very favourable terms.

The United States will be key to this effort, and Manila has signalled that US-Philippine relations areentering a new era by granting US Navy ships permission to start using Subic Bay - a strategicallyimportant naval facility from which US forces were evicted 20 years earlier. While US forces will notofficially be based at Subic, they are expected to be in the Philippines more frequently and in greaternumbers as Manila actively encourages the US pivot to Asia as a hedge against Chinese expansion.

In terms of domestic security, Manila reached a landmark agreement with the Moro Islamic LiberationFront, which it is hoped could bring an end to decades of conflict on the southern island of Mindanao.

The two sides are now embarking on the complex task of establishing a self-governing MuslimHomeland. This process will be difficult constitutionally, and could also be undermined by Muslimgroups that do not support the deal. But overall, the conclusion of years of negotiations between Manilaand the MILF leadership signifies a very bright moment in the history of the Philippines.

Over the last quarter BMI has revised the following forecasts/views:

The peace deal with the MILF is discussed in detail, including the implications of the oppositionof another separatist group, the MNLF.

The latest developments in relations between the Philippines and China are also discussed.Though relations have improved slightly since they hit rock bottom in Q2 2012, talks inSeptember between China's president-in-waiting Xi Jinping and Interior Minster Manuel Roxasfailed to break through the impasse surrounding the two countries' conflicting territorial claims.

In contrast, US-Philippines relations continue to warm. A port call by a US Navy aircraft carrier,Marine exercises and the decision to re-open Subic Bay to the US military are among the signsthat the Philippines has determined to make itself a key enabler in the US's strategic rebalancingto the Asia-Pacific region.

The Philippines' legislature confirmed the 2013 defence budget of U$2.9bn, an allocation whichshould enable further procurements. Several surface ships for the navy, and up to 50 aircraft,including fixed-wing aircraft and helicopters, are in the armed forces' procurement plans.