The brightest hope for Brazil's defence industry is the strong recovery the country has mounted from the global financial crisis. The release of Q209 GDP figures revealed that the technical recession was over and that it had been limited only to the previous two quarters. We expect a V-shaped recovery to build on the 1.9% growth seen in Q2. Renewed growth is vital to the defence industry because the expansion of the Brazilian military is tied to the expansion of the economy. When, in Q407, the government announced that it would use revenues from the huge new Tupi oilfield to fund a massive increase in defence expenditure, things look bright for military growth. But by April 2009, defence minister Nelson Jobim was saying that the army must cut its budget by 30%, slashing recruitment in half. The budget was reduced from BRL9.6bn (US$4.5bn) to BRL6.8bn. In Q109, government expenditure was down 8.8% quarter-on-quarter, although it rose 2.7% year-on-year. Despite the crisis, the Brazilian military upgrade continued in 2008. According to London's International Institute for Strategic Studies (IISS), Brazil completed an acquisition programme intended to fill shortand medium-term operational requirements in 2008. Under the programme, the military purchased a dozen second-hand Mirage 2000 fighter jets from France, two logistics ships from Great Britain, and 11 F-5E/F Tiger II fighter from the Royal Jordanian Air Force. Our figures suggest that Brazil will return to a period of rapid military expansion once the economic uncertainty is over. Between 2005-08, the defence budget expanded rapidly to a peak of US$13.5bn in 2008, as Brazil sought to compete with rapid military expansion elsewhere in South America, notably in Venezuela. We expect a recovery of the military budget in 2010 to around US$15bn. The budget is already tempting major international arms supplies: Brazil's moderate government and big spending has led the US to compete with Russia and France to fulfill the US$2.2bn FX-2 contract to supply Brazil with jet fighters. Jobim has let it be known that technology transfer to Brazil is a key requirement of the winning bid.
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