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

2024.02.07 22:36


© Reuters. FILE PHOTO: Polish troopers stand close to K9 howitzers, delivered within the first batch of arms from South Korea beneath contracts signed in latest months, throughout a navy drill at a navy vary in Wierzbiny close to Orzysz, Poland, March 30, 2023. REUTERS/Kacpe

By Joyce Lee and Cynthia Kim

SEOUL (Reuters) – Legislation aimed toward growing South Korea’s import-export lending to assist enormous new defence gross sales has stalled amid partisan impasse forward of a divisive parliamentary election, officers and analysts mentioned.

South Korea’s ruling and opposition events have each launched payments to spice up the state financial institution’s fairness capital to 25 trillion-35 trillion received ($19 billion-$26 billion), elevating the lending restrict to 10 trillion-14 trillion received, because the nation seeks to expedite Poland’s $22 billion weapons buy.

The sale is a key a part of South Korea’s plan to turn out to be the world’s fourth-largest defence exporter by 2027. But beneath present regulation, the Export-Import Bank of Korea can’t lend greater than 40% of its roughly 15 trillion received of fairness capital, or about 6 trillion received, to a single borrower.

The state financial institution already supplied about 6 trillion received in credit score through the first section of the take care of Poland, South Korea’s biggest-ever weapons sale.

Legislators haven’t but agreed to maneuver any of the limit-raising payments ahead earlier than a rare parliament session that begins Feb. 19, due to political skirmishing earlier than an April 10 basic election.

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

A change in Poland’s management final 12 months raised questions over whether or not Warsaw would scrap beforehand signed procurements. But such a transfer is unlikely as a result of it may trigger massive diplomatic fallout, mentioned Abhijit Apsingikar, an aerospace and defence analyst at GlobalData.

If there is no such thing as a credit score line to finance procurement from South Korea, nonetheless, it may put the unsigned procurement of 308 K9 howitzers and 820 K2 Black Panther tanks in jeopardy, he mentioned.

An audit of modernisation contracts is beneath manner on the Polish Ministry of National Defense, bearing in mind the wants of the Polish Army and the strategies and sources of their financing, Poland’s protection ministry mentioned in an announcement 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 want financing, comparable to defence and nuclear energy plant gross sales, as he enters the third 12 months of his five-year, single-term presidency.

South Korean defence agency LIG Nex1 received 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 mentioned 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,” mentioned a authorities official with direct information of the matter, talking on situation of anonymity due to the sensitivity of the difficulty.

In July 2022, Poland reached a primary settlement with South Korea to purchase 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 (OTC:) Rotem.

The subsequent month, Poland signed contracts for the primary section of the settlement, price 17 trillion received, for which arms together with 180 K2 tanks and 212 K9 howitzers are being produced and delivered.

But the second section, estimated by Korean media to be price about 30 trillion received ($22.52 billion), has but to be accomplished, partly as a result of the Polish authorities has taken concern with the shortage of funding from state-backed export credit score businesses (ECAs), mentioned 4 defence sources with information of the matter.

Seoul has diminished Poland’s financing hurdles with 5 native banks keen to offer a syndicated mortgage, however the Polish authorities prefers ECAs – they’re seen as extra steady as a result of they’ve authorities backing, and have decrease rates of interest, the sources mentioned.

At least one financing settlement for Hanwha Aerospace’s second contract hasn’t been reached, in keeping with the sources.

Under the contract, the monetary settlement with Hanwha should be reached by the top of June 2024, the sources mentioned. They declined to be recognized as a result of they weren’t authorised to talk to the media.

Hanwha Aerospace declined to remark.

($1 = 1,331.9700 received)

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