Polish arms export hinges on Korea’s lending power: think tank

An industrial policy think tank urged Korea to revise the Eximbank Act to increase its export financing capacity warning of potential setbacks in the country's $30 billion arms deals with Poland.

An FA-50GF fighter jet is displayed during a rollout ceremony before being delivered to Poland at Korea Aerospace Industries headquarters in Sacheon, South Gyeongsang in June, 2023. [KAI]

An industrial policy think tank cautioned that an export financing cap could jeopardize Korea's potentially $30 billion weapons deal with Poland and urged lawmakers to pass a proposed revision to the Export-Import Bank of Korea (Eximbank) Act in order to ramp up financing capacity.

“The success of arms supply deals hinges on the supplier’s ability to offer countervailing benefits such as support in export financing,” the Korea Institute for Industrial Economics & Trade (KIET) said in a report published Wednesday.

“The recently inaugurated Polish prime minister's comments suggest that Poland will continue with its military modernization, but some of the previous government's contracts may be subject to review, which may lead to alterations or cancellations,” KIET said, addressing Polish Prime Minister Donald Tusk's recent claim that certain Korean loans intended to finance the arms deals had turned out to be nonexistent.

Tusk added that though the contracts would undergo review, Poland did hope to proceed with the deals.

Should the arms contracts fall through, Korea’s ambition of becoming one of the four largest arms dealers in the world by 2027 would face a significant setback, the KIET warned. The institute called for “an immediate revision in the Korea Eximbank Act,” which has been lying dormant for months at the National Assembly.

“[Korea] needs to actively provide export finance support at the level offered by the developed countries, even though the margin may be reduced in the beginning, as it is crucial to initially enter the market to secure the aftermarket […] for the next 30 to 50 years,” the report said.

There were several revision proposals of the Korea Eximbank Act pending in the parliamentary committee as of Wednesday. One proposal aims to up the statutory limit of Korea Eximbank’s capital from the current 15 trillion won ($11 billion) to 30 trillion won. Another bill, which was put forward last October, proposed to up the limit to 35 trillion won.

Because the current law prevents the state-run bank from providing financing worth more than 40 to 50 percent of its total equity capital to a single debtor, the 15 trillion won cap puts constraints on the amount of export financing that Korea can offer to the Polish government following the first round of weapons supply deals, which was signed in 2022.

The first wave of contracts, under which Korea’s defense contractors agreed to supply 180 K-2 tanks, 212 K-9 howitzers and 48 FA-50 fighter jets, are worth about $12.4 billion in total.

The Korea Eximbank and the Korea Trade Insurance Corporation provided export financing worth 6 trillion won each to the Polish government for the first round of orders, which was already nearing Eximbank’s upper limit for loan and guarantee issuance.

The second round of orders is expected to be placed this year after a delay caused by insufficient export financing. The contracts are worth more than $30 billion, according to KIET’s estimation.

The Finance Ministry was recently reported to be considering funneling in up to 15 trillion won to the Korea Eximbank over the next seven years, but the ministry said that “no decision has been made on details of the investments for the Korea Eximbank’s additional capital expansion.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]