Written by Joyce Lee and Cynthia Kim
SEOUL (Reuters) – A bill aimed at increasing South Korea's import and export financing to support huge new defense sales is on the verge of a divided parliamentary election, officials and analysts say. It is said to be stuck in partisan deadlock.
South Korea's ruling and opposition parties have both proposed a bill that would increase the capital of state-run banks to 25 trillion to 35 trillion won ($19 billion to $26 billion) and raise the lending limit to 10 trillion to 14 trillion won. Poland's $22 billion arms purchase.
The sale is a key part of South Korea's plan to become the world's fourth largest defense exporter by 2027. However, under current law, the Export-Import Bank of Korea cannot lend more than 40% of its own capital, which is approximately 15 trillion won. Approximately 6 trillion won per borrower.
State-run banks have already provided about 6 trillion won in loans for the first phase of the agreement with Poland, which is South Korea's largest arms sale in history.
Lawmakers have not yet agreed to advance the limit-raising bill into the special session of Congress, which begins on February 19, due to political skirmishes ahead of the April 10 general election.
“If the bill is not passed in February, there will be no chance of it being passed for at least several months,” said a National Diet official who was not authorized to comment on the matter and spoke on condition of anonymity. “Given the delicate export negotiations and timelines involved, it has to be now.”
A change in Polish leadership last year raised questions about whether Warsaw would scrap previously signed procurements. However, Abhijit Apsinghikar, aerospace and defense analyst at GlobalData, said such a move was unlikely as it could trigger large-scale diplomatic fallout.
However, without a line of financing from South Korea, the unsigned procurement of 308 K9 howitzers and 820 K2 Black Panther tanks could be at risk, he said.
An audit of modernization contracts is underway at the Polish Ministry of Defense, taking into account the needs of the Polish Armed Forces and the methods and sources of financing, the Polish Ministry of Defense said in a statement to Reuters.
The ministry added: “We are in contact with all bidders who are already cooperating and with those interested in cooperation within the arms industry.”
Defense trade in jeopardy
As President Yoon Seok-yeol enters the third year of his five-year term as president, he is prioritizing high-value exports that require funds, such as defense and the sale of nuclear power plants.
South Korea's Defense Ministry announced Tuesday that South Korean defense company LIG Nex1 has been awarded a $3.2 billion contract to export intermediate-range surface-to-air missile defense systems to Saudi Arabia.
“The South Korean economy is heavily dependent on exports, and defense exports have grown to be a significant part of that, so raising capital limits is essential to support large-scale export transactions.” said a government official with direct knowledge of the matter. Due to the sensitivity of the matter, anonymity was requested.
In July 2022, Poland signed a deal with South Korea for weapons including 48 FA-50 fighter jets from Korean Aerospace Industries, 672 K9 howitzers from Hanwha Aerospace, and 1,000 K2 tanks from Hyundai Rotem. A basic agreement was reached with South Korea to purchase.
The following month, Poland signed a contract for the first phase of the agreement worth 17 trillion won, which will see the production and delivery of weapons including 180 K2 tanks and 212 K9 howitzers.
However, the second phase, estimated by Korean media to be worth about 30 trillion won ($22.52 billion), is due in part to the Polish government's concerns about a lack of funding from the state-backed Export Credit Agency (ECA). It's not finished yet. This was revealed by four defense sources familiar with the situation.
The Korean government has lowered the hurdles for Poland's financing by having five local banks willing to provide syndicated loans, but the Polish government prefers ECA. ECAs are seen as more stable because they have government support and lower interest rates, the people said.
At least one financing agreement for Hanwha Aerospace's second contract has not been reached, the people said.
The deal requires that a financial agreement be reached with Hanwha by the end of June 2024, according to people familiar with the matter. They declined to be named because they were not authorized to speak to the media.
Hanwha Aerospace declined to comment.
(1 dollar = 1,331.9700 won)
(Reporting by Joyce Lee and Cynthia Kim; Additional reporting by Pawel Florkiewicz; Editing by Josh Smith and Gerry Doyle)
