Abstract
Libya has, for the past few years, been reforming its image within the
international community. The
decision in September 2003 to lift the UN
embargo, following an agreement for compensation of
Lockerbie victims, has
been noticed within the arms trade and political arenas. The lifting of the US
and
UK economic sanctions followed this, and major deals were struck with
western oil companies. Recent
developments have seen European defence
companies moving to establish themselves in what could
emerge as a very
lucrative Libyan defence market. Libya' s extensive array of military equipment
was
mostly purchased from the Soviet Union before its collapse at the
start of the 1990s, and it is in desperate
need of modernisation. In late
2007, France and Libya agreed to a defence accord, worth a potential
EUR4bn (US$5.4bn). This is likely to be the largest defence package Libya has
signed since the
normalisation of relations with Europe. In further signs
of Libya' s increasing openness to the west,
United Kingdom Limited
confirmed in May 2008 that it had signed a GBP85mn (US$165mn) contract
to
supply a tactical communications and data system as part of the United
Kingdom' s initiatives to
improve economic, educational and defence links
with Libya. Libya also has ongoing contracts with Italy,
and in 2008 began
talks with South Korea over arms procurement.
In 2008, Russian President
Vladimir Putin visited Libya for the first time. The Russian president
signed
an agreement on the writing-off of Libya' s US$4.6bn debt to Russia,
in exchange for the conclusion of
new deals, from which up to US$2bn goes
to the quota for military and technical cooperation. However,
the signing
of the package is being held back by the fact that the issue of repayment of
the Libyan state
debt has not been settled. Over the past two years,
Rosoboronexport, a Russian state arms exporter,
prepared more than 20
contracts to supply Russian aircraft, air defence weapons, naval equipment
and
ground-based weapons to Libya. In technical terms, most of these
contracts have been fully prepared, and
some have even been initialled.
Their signing, however, is continually being delayed because it has yet
not proved possible to agree on the financial aspects.
Despite some
downward revisions to our forecasts, our outlook for the Libyan economy
remains broadly
unchanged from last quarter. Lower oil prices and
OPEC-mandated production cuts imply slightly lower
growth, but the
government appears determined to spend its way through the global downturn,
even at the
cost of a huge budget deficit. We believe that the slump in
oil prices and the collapse of real estate
markets in the Gulf will make
investors think twice before entering the Libyan market. That is not to
say
that investment is drying up, just that greater caution is likely over
the next year or two. Overall, we see
real GDP expanding by 4.7% in 2009,
rising to 5.6% in 2010. Like neighbouring Algeria, Libya' s lack of
economic diversification, while detrimental to its long-term health, will
actually shield it from the worst
of the global crisis.
Libya' s hints
about nationalising foreign oil company assets will cause nervousness among
some foreign
investors. Libyan leader Muammar Qadhafi has been
inconsistent in his attitude toward foreign
investment and economic
policy. However, Libya is unlikely to suddenly seize assets.
Overall, we
remain optimistic about the growth potential of Libya' s defence industry.
Defence
expenditure was estimated at about US$670mn in 2007, and it is
forecast to rise to some US$730mn by
2010. Import figures will rise
substantially over the coming years, as Libya updates and replaces its
ageing Soviet equipment. We expect that the Libyan government will increase
defence spending by
nearly 7% annually, in real terms, over the coming
years - although this will depend on how the country' s
economy fares in
the face of the global financial crisis, and on the extent to which oil prices
recover in
2009.
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