[KH Explains] Financing limbo threatens W30tr Polish arms deal

With April general election looming, National Assembly not moving on revision bill

South Korean-made K-9 howitzers are seen during the Armed Forces Day Parade in Warsaw, Poland, on Aug. 15, 2023. (Getty Images)

South Korea's ambitious multibillion-dollar arms export deals with Poland may be at risk, as the National Assembly continues to sit dormant on a bill that must be passed in order to for the deals to come through.

Having signed an initial comprehensive arms export agreement worth 17 trillion won ($12.7 billion) for tanks, howitzers and fighter jets in July 2022, the related Korean defense companies -- Hyundai Rotem and Hanwha Aerospace -- and the Polish government have been negotiating to follow up with a second deal within just a year.

But the additional deal has yet to be inked, as the state-run Export-Import Bank of Korea, or Eximbank, has hit its legal lending limit from last year's megasized deals.

Often in large-scale export deals, the bidding country provides loans to its trading partner to assist in funding the deal. South Korea lent 17 trillion won to Poland, with Eximbank and Korea Trade Insurance Corp. each executing loans and guarantees worth 6 trillion won.

While the Polish government reportedly requested over 20 trillion won in capital support for the secondary deal worth 30 trillion won, Eximbank could not extend the credit as it has nearly reached its legal cap as stipulated by law.

Under the current law concerning the Eximbank's governance, the institution can lend up to 40 percent of its equity capital to a borrower. As of July, the bank's capital totaled 18.4 trillion won -- inclusive of its 15 trillion won legal capital -- leaving around 7.35 trillion won as its loan limit for Poland. Having already financed 6 trillion won in the first deal, only around 1.35 trillion won is left for Eximbank to finance for Poland.

Lawmakers from both the ruling and opposition parties have proposed to raise the state-run lender's statutory cap limit to between 30 trillion and 35 trillion won, at least doubling from the current 15 trillion won.

Yet, due to political factors, little progress has been made and the bills remain pending at the relevant standing committees without even being properly discussed.

Concerns about the bill's passage, and timely assistance for the exports, have been growing recently, as the 21st National Assembly is set to end with the upcoming general election in April, by which the time the bill would be automatically scrapped if it is still pending.

Not only will the revision procedure have to start from scratch again in the 22nd Assembly, but in a worst-case scenario the second arms export deal with Poland may end up as collateral damage -- either reduced in size or totally ditched.

An official from the defense industry said Wednesday he was not so positive on the outlook of the amendment getting passed by this Assembly.

"It's very worrying. With the general election happening in April, the previous month will mostly be about the elections, which means the bill must be discussed at the parliament by the end of February," the official, who asked to remain anonymous, told The Korea Herald.

Under the circumstance, the South Korean government is considering pooling capital partially through a syndicated loan from the private sector. In November, it was reported that the Defense Ministry asked the country's top five commercial banks -- KB Kookmin, Shinhan, Hana, Woori and NongHyup -- to provide a loan of around 3.5 trillion won to the Polish government to help finance the secondary deal.

But sources from the industry thought it unlikely that the Polish government will opt for the syndicated loans, citing higher interest rates compared to government-financed loans as among the reasons.

Whether the syndicated loan was still undergoing negotiations, or details as to its execution, could not be confirmed with the banks.

Adding to the concern is the nearing deadline for Hanwha Aerospace's execution deal for part of the secondary contract. The company announced it had signed with Polish Armaments Agency to execute around 3.4 trillion won of additional arms, on the condition that the funding is raised by June.

"If the funding doesn't come through before the deadline, we have no money, so it will be impossible to export," the defense industry official said.

This is a much bigger risk than expected, the official added, saying the deals with Poland are not a matter of importance for just the companies, but for the whole defense industry on its foray into the global market.

President Yoon Suk Yeol has repeatedly stressed the goal to place South Korea as the fourth-largest player in the global arms export market by 2027, and the deals with Poland have largely propelled the country toward that goal.

Korea has recently became the ninth-biggest weapons supplier in the world, as its arms export jumped by 74 percent from the 2013-2017 period to the 2018-2022 period, according to a Stockholm International Peace Research Institute data.

By Choi Ji-won(jwc@heraldcorp.com)