Overall, the results of the US election are a credit positive for the US defense industry, according to Fitch Ratings. Fitch’s US defense sector credit view has improved as a result of the election, building on our existing expectations for rising government spending over the next five years.
The US Department of Defense budget and defense spending will likely rise over the next four years, with upside to the current Future Years Defense Program driven by low readiness levels in many parts of the armed forces and the array of global threats.
Navy spending is a key potential beneficiary, as is cybersecurity.
There are also indications that NASA funding could rise. Homeland Security Department spending should also get a boost, with border security a focus area and a potential source of new contracts for the defense sector.
(Budget cuts having harsh affects on border security in the Rio Grande Valley.
Agents report being out of gas and out of options, leaving some to wonder just how safe our border really is. Courtesy of CBS 4 News Rio Grande Valley and YouTube)
Higher spending in all of these areas will also further Trump’s objective of creating domestic jobs.
Fitch bases its defense ratings on the assumption that existing budget caps will continue to be overridden, and Fitch expects this assumption is stronger as a result of President-elect Trump’s goal of repealing the caps.
Fitch also expects temporary continuing resolutions (CRs) will still be a risk, but less than in the past decade as a result of the elections. A CR is in place through Dec. 9, and Fitch expects another defense CR is likely to extend into January, when the new government is in place.
The election’s impact on defense exports by US companies is less certain.
International defense sales growth has been a trend in the US defense sector, so the next administration’s trade policies are a concern. Many international defense contracts have offset requirements for some manufacturing to take place outside the US.
Fitch believes that the critical views on trade emanating from the incoming administration could affect some overseas defense campaigns, potentially putting US-based contractors at a disadvantage.
(A Fox News exclusive takes you to the home of Marine Corp Aviation where most jets are nearly 25 years old, parts are being reused and pilots are missing out on vital training. Courtesy of Fox News and YouTube)
Streamlining the regulatory approval process for defense exports could mitigate this concern.
Also, pressure on allies to spend greater amounts on defense could increase export opportunities for US companies. It remains to be seen whether strategic considerations outweigh trade policies.
Key defense and security developments to watch over the next several months include the degree of coordination among Republicans in the government, the selection of the new Defense secretary and the submission of the fiscal 2018 budget request early in the new administration.
A key risk to the favorable outlook is that the unified Republican government will not be able to achieve easily all of its objectives. The smooth passage of defense measures through congress could be hampered by the slim Republican majorities in both houses of Congress, divisions within the Republican Party, Trump’s outsider status and rules in the Senate.
Additional information is available on www.fitchratings.com.
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