By Manuel Mogato
SUBIC BAY, Philippines (Reuters) - The Philippines took possession of a former U.S. Coast Guard ship on Tuesday, part of its biggest military upgrade in decades, as a stronger economy allows it to raise spending to counter China's growing assertiveness in disputed waters.
The military build-up, which is heavily focused on maritime capability, is likely to add to tension over the South China Sea that has threatened to draw in the United States as it refocuses its military attention on Asia.
President Benigno Aquino and senior ministers watched as the frigate, BRP Ramon Alcaraz, sailed into the Philippines' Subic Bay, a former U.S. naval base, after a two-month voyage from South Carolina, where its 88 Philippine crew trained for a year.
The 46-year-old Hamilton-class cutter, the second of its type the Philippines has received from its U.S. ally, will be used to patrol areas of the South China Sea near the Philippine coast that have become a major source of tension with Beijing.
"It's very clear - real growth is possible only if there's genuine stability and peace in our nation," Aquino said in a speech, adding the country needed to "erase the image" of a poorly equipped military.
Aquino is determined to modernize the navy and air force after three past administrations failed to implement a 330- billion-peso ($7.6-billion) spending plan passed in 1995, after the Chinese occupation of the half-submerged Mischief Reef.
But a weak economy and two long-running insurgencies by Maoist and Muslim rebels drained the country's funds and left it with one of Southeast Asia's weakest militaries.
When Aquino took over in 2010, just 10 percent of the 1995 plan's budget had been used.
He won congressional approval to extend the plan 15 years and spend $1.7 billion to upgrade the military over the next five years, helped by robust economic growth that hit 7.8 percent in the first quarter this year, the fastest in Asia.
China, Taiwan and Vietnam claim the entire South China Sea while Brunei, Malaysia and the Philippines have partial claims on areas believed to have rich deposits of oil and natural gas.
Last year, China added to Manila's alarm by occupying the Scarborough Shoal just 124 nautical miles off the Philippine coast, following a tense stand-off with Philippine vessels.
The Philippines received the latest cutter for free under Washington's foreign military financing program, but spent about $15 million to upgrade its weapons and radar systems.
General Emmanuel Bautista, head of the 130,000-member armed forces, said the ship would make "a big contribution" to efforts to secure Philippine territorial waters against intrusions.
"We want to improve our maritime domain awareness so that we know what is going on around us and also be able to respond to some contingencies," Bautista told Reuters in an interview.
"BRP Ramon Alcaraz is going to fill the gap between now and the delivery of new frigates," Bautista said, adding that the armed forces also plan to buy radars, surveillance planes, fighters, and helicopters under the $1.7-billion plan.
Manila has opened talks to acquire a dozen new fighter jets and two frigates from South Korea. It has also ordered 10 coast guard ships from Japan and three more vessels from France.
The military says the government needs to double its defense spending from 1.2 percent of GDP now, in order to properly spot, monitor and prevent intrusions over its vast maritime borders.
Until then, Bautista said, it was "practical" and "pragmatic" to allow a U.S. military presence in the Philippines. "It is a deterrence against external threats," he said. "That's the order of the day now. Nobody stands alone."
The Philippines said last week that Washington had stepped up its military assistance package next fiscal year to about $50 million from $30 million, which would be the highest level since U.S. troops returned to the Philippines in 2000.
The Philippine military has also revived plans to build new air and naval bases at Subic Bay that American forces could use, senior navy officials told Reuters in June.
($1=43.6100 Philippine pesos)
(Reporting by Manuel Mogato; Editing by Stuart Grudgings and Clarence Fernandez)