Despite an announcement by Chinese Defence Minister Liang Guanglie that China ‘never intends to threaten any nation’, in relation to the South China Sea, the Philippines and other neighbouring countries remain concerned. Both Philippine and Vietnamese defence ministers have made claims of harassment by China to their oil, gas and fishing ships.
Chinese ships moved into waters near the islands claimed by the Philippines in May 2011. Further, the Philippines claims that two Chinese patrol ships chased off a Philippines Forum Energy survey vessel on March 2 2011 near the Spratly Islands. On April 5 2011, following this episode, the Philippines made a formal complaint to the UN over China’s claim of sovereignty over the South China Sea. Such maritime incidents are likely to increase as China increases its surveillance fleet size.
In May 2011, the Philippines Navy took delivery of the first of three former US Coast Guard patrol vessels. The ship will be one of the largest in the navy and will patrol Philippine territorial waters.
According to Defence Secretary Voltaire Gazmin, the Philippines military forces are not strong enough to prevent foreign incursions into disputed territories in the South China Sea. Gazmin further said that a large amount of funds is required to upgrade the military forces. He said that many naval vessels have ‘succumbed to the punishment of wear and tear’, unserviceable ships are left unrepaired and unreplaced, and that the remaining ships are substandard. He added, ‘this is truly deplorable but plain reality’.
Air Force Chief Lt. Gen. Oscar Rabena announced that the Air Force has proposed – over the period 2012-2016 – the purchase of trainer jets, long-range patrol aircraft and 16 combat helicopters, as well as an air defence and surveillance radar system. The total estimated cost would be around PHP14bn (US$325mn).
The Philippines continues to experience hostile insurgent activity from MILF, MNLF, Abu Sayyaf and the New People’s Army.
Indonesia and the Philippines have agreed to step up cooperation in fighting terrorism and we believe that the speeding up of efforts to make clear the maritime boundary is a key step in the right direction. Should terrorism attacks decline over time, both countries will become even more attractive to investors.
Approval ratings for President Benigno Aquino III are still high, but concerns about job creation and rising prices are starting to mount among the people. We expect fiscal reforms to be relatively slow this year as Aquino prioritises minimising unrest and maintaining popularity. Despite strong economic growth in 2010, the country's unemployment rate in end-2010 was unchanged at 7.1% when compared to end- 2009.
The Philippines economy, having capped a stellar 2010 registering full-year real GDP growth of 7.3% (the highest in over two decades), is likely to see headline activity cool in 2011 and 2012. We are projecting real GDP growth to 5.1% in 2011 (from 5.3% previously and 4.8% for 2012). With the Middle East and North Africa crisis still ongoing and the impact of Japan's earthquake still unclear, we flag up headwinds in Q311 amid a slowdown in export and remittance growth.

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Executive Summary . 5
SWOT Analysis 7
Philippines Security SWOT . 7
Philippines Defence Industry SWOT . 8
Philippines Political SWOT 9
Philippines Economic SWOT 10
Global Political Outlook 11
Japan After The Quake . 12
Global Hotspots: Libya, Iran, Afghanistan, Korea . 13
Wild Cards To Watch 17
South East Asia Security Overview . 19
Security Risk Analysis 31
BMI’s Security Ratings . 31
Table: Asia Pacific Regional Security Ratings 31
Table: Asia Pacific State Vulnerability To Terrorism Index . 32
Philippines Security Risk Ratings . 32
City Terrorism Rating . 33
Table: BMI’s Asia City Terrorism Index . 34
Political Overview 35
Domestic Politics 35
Foreign Politics 36
Long-Term Political Outlook 37
Security Overview 41
Internal Security Situation 41
Moro Islamic Liberation Front (MILF) 42
Moro National Liberation Front (MNLF) . 43
Abu Sayyaf 44
Table: Philippine Insurgent Groups . 44
External Security Situation . 44
Piracy . 45
Table: Instances of Piracy In South East Asia, 1996-2006 . 45
The South China Sea . 46
Bilateral Military Relations 47
Armed Forces And Government Spending . 48
Armed Forces . 48
Government Expenditure 49
International Deployments 51
Weapons Of Mass Destruction 52
Market Overview 53
Industry Trends And Developments 54
Arms Trade Overview . 54
Procurement Trends And Developments . 55
Industry Forecast Scenario . 57
Armed Forces . 57
Table: Philippines’ Armed Forces, 2000-2008 (‘000 personnel, unless otherwise stated). 57
Table: Philippines’s Available Manpower For Military Services, 2008-2015 (‘000, aged 16-49, unless otherwise stated) 57
Defence Expenditure . 58
Table: Philippines’ Government Defence Expenditure, 2008-2015 . 59
Table: Philippines’s Defence Expenditure Related To GDP, 2008-2015 (US$mn) 59
Defence Trade . 59
Table: Philippines’s Defence Exports, 2008-2015 (US$mn and % change y-o-y) . 60
Table: Philippines’s Defence Imports, 2008-2015 (US$mn) . 60
Table: Philippines’s Defence Trade Balance, 2008-2015 (US$mn) . 61
Macroeconomic Forecast . 62
Table: Philippines - Economic Activity . 64
Company Profiles 65
Arms Corporation of the Philippines (Armscor) . 65
Government Arsenal . 66
BMI Methodology . 67
How We Generate Our Industry Forecasts . 67
Defence Industry . 67
City Terrorism Rating . 68
Table: Methodology 70
Sources . 70
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