Loan Limits
Country-specific lending limits at export credit agencies (ECAs) such as the Export-Import Bank of Korea (Korea Eximbank) and Korea Trade Insurance Corporation have emerged as a variable in finance for Korean defense exports. Korea exported 17 trillion won (US$17 billion) worth of defense goods to Poland in 2022, and negotiations for additional contracts are underway. But concerns are growing that ECA financial support for the exports will be hampered by same-borrower loan limits.
According to the Export-Import Bank of Korea’s loan and guarantee data by item and country on July 3, the state-run bank provided 488.2 billion won (US$375.7 million) in financial support in the form of loans and guarantees to the defense sector in the first five months of this year. The total amount of loans and guarantees provided by Korea Eximbank to all industries in the same period was 31.8 trillion won. Export finance for Korea’s defense exports accounted for 1.6 percent of the total export finance provided by Korea Eximbank this year.
However, when the scope is narrowed down to the defense sector, the amount of loans and guarantees provided by Korea Eximbank in connection with purchases of weapons signed from 2018 to 2021 ranged from 100 to 500 billion won per year. But the figure surged to the two trillion won range in 2022. Guarantees with Poland accounted for most of the financial support, in the US$2 trillion range.
The share of financial support for Korea’s defense exports to Poland soared in 2022 compared to the amount of financial support provided every year from 2018 to 2021. In addition to Poland, Korea Eximbank provided defense-related financial support to the United Arab Emirates (UAE), Egypt, and Indonesia in 2022. Korea and Poland are still negotiating the details of the financial support for the purchase price of the first batch of Korea’s defense exports to Poland in 2022. This is because an export contract and a financing contract are counted as separate contracts. Regarding the first batch, some industry sources say that Korea Eximbank is discussing a plan to provide US$5 billion, and Korea Trade Insurance Corporation is considering providing US$5 billion.
Those working at state-run financial companies are more interested in the second batch of defense exports to Poland in negotiation than the first batch. The question is whether the Korean government can afford to finance the second batch. According to the Enforcement Decree of the Export-Import Bank of Korea Act, the state-run lender cannot provide credit to the same borrower for more than 40 percent of its equity capital. “Currently, the credit (loan) limit for the same borrower is about US$6.1 billion, which is 40 percent of Korea Eximbank’s equity capital of US$15.2 billion,” Korea Eximbank said.
Given the aforementioned rules, Korea Eximbank will be unable to afford to give additional loans and guarantees to Poland if it provides US$5 billion in support for the first batch. The bank’s total loans and guarantees to Poland for all industries, including defense, were 780 billion won in 2020, 1.4 trillion won in 2021, and 2.8 trillion won in 2022. “Even if there is some loan repayment by Poland, it is not easy to support the second batch considering the eight trillion won limit for each country,” a financial institution official said.
The simplest solution is to amend the Export-Import Bank of Korea Act to scale up its statutory capital (15 trillion won at the moment). Democratic Party lawmaker Jung Sung-ho proposed an amendment to increase the capital to 25 trillion won, but discussion has not started yet.
Another way is to grant an exception to the 40 percent credit limit. The Financial Services Commission (FSC) granted an exception to the credit limit for KDB and Korea Eximbank for Hanwha Group in June. “If the government, including the FSC and the Ministry of Strategy and Finance, has the will, it can solve the problem by granting exceptions,” said one industry insider.
However, there is a counter-argument that it is not desirable to suddenly expand financial support for the defense industry or certain countries just to be in line with the current government’s policies. With regard to the second batch, some experts say that Korean Eximbank and Korea Trade Insurance Corporation will have to provide financial support of more than 20 trillion won to Poland. There are also concerns that increased financial support in the form of loans may have some impact on Korea’s international procurement of foreign currencies.