February 23, 2024
Finance

Financing uncertainty clouds South Korea’s push for massive arms deals


By Joyce Lee and Cynthia Kim

SEOUL (Reuters) – Legislation aimed at increasing South Korea’s import-export lending to support huge new defence sales has stalled amid partisan deadlock ahead of a divisive parliamentary election, officials and analysts said.

South Korea’s ruling and opposition parties have both introduced bills to boost the state bank’s equity capital to 25 trillion-35 trillion won ($19 billion-$26 billion), raising the lending limit to 10 trillion-14 trillion won, as the country seeks to expedite Poland’s $22 billion weapons purchase.

The sale is a key part of South Korea’s plan to become the world’s fourth-largest defence exporter by 2027. But under current law, the Export-Import Bank of Korea cannot lend more than 40% of its roughly 15 trillion won of equity capital, or about 6 trillion won, to a single borrower.

The state bank already provided about 6 trillion won in credit during the first phase of the deal with Poland, South Korea’s biggest-ever weapons sale.

Legislators have not yet agreed to move any of the limit-raising bills forward before an extraordinary parliament session that starts Feb. 19, because of political skirmishing before an April 10 general election.

“There won’t be a chance to pass the bill for at least some months (if not passed in February),” said a parliamentary official, who was not authorised to speak on the matter and declined to be identified. “Given the involvement of sensitive export talks and schedules, it needs to be now.”

A change in Poland’s leadership last year raised questions over whether Warsaw would scrap previously signed procurements. But such a move is unlikely because it could cause massive diplomatic fallout, said Abhijit Apsingikar, an aerospace and defence analyst at GlobalData.

If there is no credit line to finance procurement from South Korea, however, it could put the unsigned procurement of 308 K9 howitzers and 820 K2 Black Panther tanks in jeopardy, he said.

An audit of modernisation contracts is under way at the Polish Ministry of National Defense, taking into account the needs of the Polish Army and the methods and sources of their financing, Poland’s defense ministry said in a statement to Reuters.

“We are in contact with all bidders with whom we already cooperate, as well as with those who are interested in cooperation within the arms industry,” the ministry added.

DEFENCE DEALS AT RISK

President Yoon Suk Yeol has prioritised big-ticket exports that need financing, such as defence and nuclear power plant sales, as he enters the third year of his five-year, single-term presidency.

South Korean defence firm LIG Nex1 won a $3.2 billion deal to export a mid-range surface-to-air missile defence system to Saudi Arabia, South Korea’s Ministry of National Defence said on Tuesday.

“South Korea’s economy relies heavily on exports, and defence exports is a growing to be key part of it, so it is essential to raise that capital limit to support major export deals,” said a government official with direct knowledge of the matter, speaking on condition of anonymity because of the sensitivity of the issue.

In July 2022, Poland reached a basic agreement with South Korea to buy arms that included 48 FA-50 fighter jets from Korea Aerospace Industries, 672 K9 howitzers from Hanwha Aerospace and 1,000 K2 tanks from Hyundai Rotem.

The next month, Poland signed contracts for the first phase of the agreement, worth 17 trillion won, for which arms including 180 K2 tanks and 212 K9 howitzers are being produced and delivered.

But the second phase, estimated by Korean media to be worth about 30 trillion won ($22.52 billion), has yet to be completed, partly because the Polish government has taken issue with the lack of funding from state-backed export credit agencies (ECAs), said four defence sources with knowledge of the matter.

Seoul has reduced Poland’s financing hurdles with five local banks willing to provide a syndicated loan, but the Polish government prefers ECAs – they are seen as more stable because they have government backing, and have lower interest rates, the sources said.

At least one financing agreement for Hanwha Aerospace’s second contract hasn’t been reached, according to the sources.

Under the contract, the financial agreement with Hanwha must be reached by the end of June 2024, the sources said. They declined to be identified because they were not authorised to speak to the media.

Hanwha Aerospace declined to comment.

($1 = 1,331.9700 won)

(Reporting by Joyce Lee and Cynthia Kim; Additional reporting by Pawel Florkiewicz; Editing by Josh Smith and Gerry Doyle)



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