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

Korea Aerospace Industries

08/02/2024 02:58

By Joyce Lee and Cynthia Kim
       SEOUL, Feb 8 (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  079550.KS  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  047810.KS , 672 K9 howitzers from Hanwha
Aerospace  012450.KS  and 1,000 K2 tanks from Hyundai Rotem
 064350.KS . 
        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)
 ((joyce.lee@tr.com;))