“Manila is trying to modernize its armed forces significantly, but the difficult economic climate right now is making that difficult”
The Philippines is working to enhance its defense capabilities, striving to catch up with neighboring countries while dealing with periodic conflicts with Beijing over disputed waters. In 2024, the defense budget was increased to 278.1 billion pesos ($4.8 billion). Recently, Philippine President Ferdinand Marcos Jr. approved a “wish list” of military acquisitions valued at over $35 billion (2 trillion Philippine pesos), to be financed over the next decade. This effort is part of an ongoing military modernization initiative that began in 2012.
Since President Marcos has adopted a more assertive stance against China compared to his predecessor, there has been heightened demand for improved defense capabilities. In recent years, the Philippines has made significant acquisitions, including $375 million worth of Indian BrahMos cruise missiles. Additionally, contracts have been signed with Hyundai Heavy Industries, a South Korean shipbuilding company, for two operational Jose Rizal-class frigates, six offshore patrol boats, and two missile corvettes, all to be delivered over the coming years. These patrol boats and corvettes have a combined price tag of around a billion dollars.
Despite these efforts, increasing the defense modernization program to $35 billion over ten years would represent a significant rise over current and historical spending levels. For perspective, 40 billion pesos is allocated for defense modernization in 2024, funded by a special fund legally distinct from the Department of National Defense budget. At current exchange rates, this is equivalent to $694 million, up from $477 million in 2023. Thus, to achieve the $35 billion target, the government would need to rapidly and substantially increase spending.
A critical question is whether the Philippines can afford to modernize its military at a cost of several billion dollars annually. Given the current budgetary position for 2024, the answer is likely no. Planners made optimistic economic assumptions for 2024, predicting GDP growth of 6.5 – 7%. However, with first-quarter growth at 5.7%, it seems the actual growth may be closer to 6%. Additionally, they anticipated lower borrowing costs and interest rates, with a 364-day Treasury bill yield expected between 4 and 5.5 percent in 2024. Currently, it stands at 6%.
Slower growth and rising borrowing costs will strain government financial resources. The 2024 budget forecasted a fiscal deficit of 5% of GDP, assuming central banks, led by the US Federal Reserve, would ease interest rates this year. However, it appears the Fed will maintain stable interest rates for some time. This makes it an inopportune time to embark on significant military spending due to slower economic growth, an impending deficit, higher interest rates, and borrowing costs. Consequently, taking out loans now is not ideal for the government.
On the other hand, given China’s growing territorial incursions, the Philippines cannot afford to delay military upgrades. This implies that the Marcos Jr. administration will likely continue pursuing large-scale purchases to enhance air and naval defense capabilities.
Rising Tensions in the South China Sea
“Tensions between China and the Philippines are raising the prospect of an armed clash in the South China Sea”
The escalating maritime tensions between the Philippines and China have highlighted the potential for armed confrontation in the South China Sea, posing significant threats to the international trade. Recent incidents between Beijing and Manila have heightened concerns. In February, the Philippines reported that a Chinese Navy ship used its “fire control radar” to target a Philippine Navy ship near Commodore Reef in the Spratly Islands, a claim that China disputes. Furthermore, China established two new research stations in the Spratly Islands’ Fiery Cross Reef and Subi Reef in March, featuring military-grade runways and defense silos. In April, Beijing created two new municipal districts to enhance its maritime claims in the South China Sea, increasing military patrols and operations in the area.
The historical context adds layers to the current tensions. Efforts to increase Japan’s military budget and involvement may evoke memories of its invasions during World War II, including the Philippines. Nevertheless, defense and security ties between Japan and the Philippines have been strengthening, with both nations seeking to counterbalance China’s assertiveness. Philippine President Marcos and Japanese Prime Minister Kishida are working to build security coalitions to enhance the Philippines’ limited capacity to defend its territorial claims. The South China Sea, a vital global commerce route, is largely claimed by China, despite partial contestation from the Philippines, Vietnam, Malaysia, Brunei, and Taiwan. The United States, aiming to reassure its Asian allies and counter China, has been fortifying a network of military alliances across the Indo-Pacific.
In the South China Sea, since last year, Chinese and Philippine coast guard and naval ships have had several heated encounters. The most violent clash occurred on June 17, when two Philippine naval supply vessels were repeatedly attacked and damaged by Chinese coast guard personnel armed with knives, spears, and an axe near the disputed Second Thomas Shoal. Several Filipino sailors were injured, and Chinese coast guard staff seized seven navy firearms. The Philippines lodged a strong protest, demanding $1 million for damages and the return of the firearms. China, however, claimed the violence was provoked by the Philippines entering what it considers Chinese territorial waters.
International responses were swift, with Japan and the United States among the first to express concern and urged Beijing to adhere to international law. These conflicts signify the fragile balance of power and the urgent need for diplomatic resolutions to prevent further escalation in one of the world’s most crucial maritime regions.
Maritime Challenges
Beijing aggressively advances its claims and Manila continues fishing and resupply activities for Filipinos at the disputed shoals. Within its 200-mile Exclusive Economic Zone (EEZ), the Second Thomas Shoal in the Spratly Islands is central to the Philippines’ most acrimonious conflicts with China. In 1999, the Philippines deliberately grounded a ship to claim the region, which it refers to as the West Philippine Sea. Since then, the Philippines Coast Guard has conducted monthly resupply operations to the ship, known as the BRP Sierra Madre, for its military contingent onboard the rusting vessel. Conflicts escalated in 2023 when Chinese Coast Guard warships began using risky methods to stop Philippine resupply trips, leading to an increase in collisions and the use of water cannons and military-grade lasers by the Chinese Coast Guard.
Amid rising tensions with China, the Philippines has strengthened its alliances with other nations in the Indo-Pacific region. President Marcos has signed agreements to expand arms exports, joint exercise training, and base access with the United States. The Mutual Defense Treaty between the United States and the Philippines covers both nations’ armed forces, public vessels, and aircraft operating in the South China Sea, as confirmed by U.S. Secretary of Defense Lloyd Austin in March 2024. Meanwhile, in this picture, Japan as a key player has also increased its influence in maritime security in recent years by providing military hardware to Vietnam and the Philippines.
Budgetary Expansion
In response to ongoing tensions in the disputed South China Sea, the Philippines plans to continue increasing its defense spending while seeking private sector cooperation to safeguard the nation’s maritime rights. Defense Secretary Gilberto Teodoro has been advocating for the defense budget to exceed 1% of GDP, excluding military pensions. This initiative aims to enhance the country’s defense capabilities and narrow the gap with its regional neighbors, particularly as periodic conflicts with Beijing inflict damage on the Philippines’ military assets. For 2024, the defense budget has been raised to $4.8 billion.
Teodoro has called on the private sector to facilitate the sale of debt instruments to generate funding for the Philippines’ claims in the South China Sea. Speaking at a business roundtable on July 10, he emphasized the role of investors in determining market appetite for these instruments. He noted that the target buyers are investors seeking to benefit from a potential upgrade in the country’s credit rating and other defense industry projects. Teodoro highlighted the importance of finding “creative ways” to secure funds, stressing that the primary goal is to alleviate the government’s fiscal burden without compromising modernization efforts.
Modernization Goals
The Philippines aims for sustained economic growth to catch up with its regional neighbors, targeting robust GDP growth similar to countries like Vietnam and Indonesia. In 2024, the Philippine economy is focusing on diversification, reducing dependence on remittances by expanding its industrial and services sectors. The “Build, Build, Build” infrastructure program remains a cornerstone of this strategy, aiming to enhance transportation, energy, and communication networks, which are critical for improving productivity and attracting foreign direct investments.
The Philippines is also prioritizing defense modernization to address both internal and external security challenges. The Armed Forces of the Philippines (AFP) are undergoing significant upgrades, including acquiring modern military equipment and enhancing capabilities in cybersecurity and maritime defense. This modernization is crucial for protecting the country’s territorial integrity, especially given the rising tensions in the South China Sea and the broader Indo-Pacific region. The Philippines aims to align its defense capabilities with those of regional allies, such as Japan and Australia, to strengthen its strategic position.
Balancing fiscal stability with defense upgrades is a critical challenge. While defense modernization is essential, it must be pursued without compromising economic stability. This requires careful fiscal management to avoid excessive debt while ensuring adequate funding for defense projects.
To achieve its modernization goals, the Philippines is enhancing regional cooperation and strategic partnerships. Engaging with ASEAN and QUAD countries, as well as strengthening bilateral ties with the United States, Japan, and Australia, provides access to advanced technology, training, and defense systems. These partnerships also offer economic benefits, such as trade agreements and investment opportunities, which are instrumental in supporting the Philippines’ overall modernization efforts.
Challenges and Prospects
China’s numerous confrontations with South China Sea (SCS) countries have become a testing ground for assessing its military capability in the Pacific and the politico-security resolve of successive US administrations. The most recent incident involved dangerous maneuvers by Chinese ships, which fired water cannons at Philippine Coast Guard (PCG) ships carrying supplies for Filipino soldiers stationed on the Second Thomas Shoal (known as Ayungin Shoal in the Philippines) in the Spratly Islands. In June of this year, Chinese ships attempted to stop two PCG vessels from entering the Second Thomas Shoal while escorting two wooden resupply boats. Similar incidents occurred in February and July this year.
At the center of this controversy is the BRP Sierra Madre, a Filipino ship that ran aground on May 9, 1997. Since then, the Philippines has utilized the ship as a sovereign outpost, stationing eight soldiers onboard to counter China’s claims. China wants the ship removed, but Philippine President Ferdinand Marcos Jr. has indicated that the Philippines will not withdraw or “pull out a World War II-era ship from the Ayungin shoal in the South China Sea.” According to National Security Council spokesperson Jonathan Malaya, “China’s increased presence at the Second Thomas Shoal will not deter the Philippines’ resolve to protect its position there.” He emphasized that “the Philippines will not give up the Ayungin Shoal or remove the warship from the atoll which was intentionally grounded in 1999 to reinforce the Philippines’ sovereignty claims.”
A joint statement released by the National Task Force of the Philippines on the Ayungin Shoal incident pointed out that China had once again violated the 2016 Arbitral Award, which clearly stated that the Ayungin shoal “can neither be a subject of a sovereignty claim nor is it capable of appropriation under international law.” As such, China’s aggressive tactics in preventing Filipino vessels constitute a blatant breach of the United Nations Convention on the Law of the Sea (UNCLOS), to which both nations are parties.
On the other hand, China claims that after learning of the Philippines’ resupply plan, the Chinese Coast Guard warned the Philippines not to send “construction materials used for large-scale repair and reinforcement of the warship” because this would violate the Declaration of the Code of Conduct of the Parties (DOC). China’s strategy has always been to interpret international law, such as UNCLOS and the 2016 Arbitral Award, in ways that justify its assertiveness and expansionary claims in the disputed waters. Relations between the Philippines and China have significantly deteriorated during Marcos Jr.’s administration, which has not shied away from criticizing China’s conduct in the South China Sea. The Philippines is perceived as tilting towards the United States, as seen by the expansion of the Enhanced Defence Cooperation Agreement (EDCA), under which the Philippines granted the US access to four more military facilities in April 2023.
The expanding US-Philippines relationship is irritating China, prompting it to use forceful and coercive measures to assert its presence and push the Philippines to comply with Chinese demands. According to a US statement, an assault on Philippine military vessels, aircraft, and armed troops, including its coast guard, operating in the SCS would trigger mutual defense commitments. As China’s challenge to the US in the Pacific intensifies, the US tries to orient its security strategy in the Pacific around partnerships with the Philippines, as China seeks to dominate subregions such as the South Pacific. The South China Sea is gradually becoming a theater in the US-China great power confrontation.Â
End Note
The Philippines is significantly increasing its defense spending to safeguard its territorial integrity against China’s assertiveness in the South China Sea, modernize its armed forces to address contemporary security threats, and strengthen regional security alliances with ASEAN and other partners. Despite economic challenges, the country is committed to balancing fiscal stability with defense modernization to create a credible defense posture, enhance regional cooperation, and contribute to stability in the South China Sea. The Philippines’ efforts aim to ensure a secure and prosperous future in the rapidly evolving Indo-Pacific region, advocating for a peaceful resolution to conflicts through sustained dialogue and collaboration with global partners.
