Domestic defense companies that have signed arms supply contracts with Poland are facing a critical situation in June. Hanwha Aerospace and others signed a second arms supply contract worth trillions of won with Poland, but the contract is at risk of termination as the inflow of statutory capital to the Export-Import Bank of Korea (KEXIM), which is responsible for credit provision, is delayed. Previously, KEXIM expanded the statutory capital limit by 10 trillion won through a legal amendment to increase the scale of policy finance that can be granted to individual companies. However, the government, which must actually inject the funds, still maintains a stance that "review is necessary," causing companies to become anxious.
A Ministry of Economy and Finance official said on the 16th, "We are comprehensively considering the appropriate scale of support we can provide under our circumstances and are consulting with related ministries," adding, "We understand the urgency of the situation, including the financial contract deadline at the end of June, and that we must not miss this opportunity, but we must not burden our financial institutions, so we are continuing discussions, including the K-ho-gaeng issue."
The scale of the arms supply contract with Poland is considerable. Hanwha Aerospace signed a second execution contract last month for 72 Chunmoo multiple launch rocket systems and in December last year for 152 K-9 self-propelled howitzers. The contract amounts are 3.4 trillion won and 2.3 trillion won, respectively. Poland attached a condition for policy finance institution guarantees from KEXIM and the Korea Trade Insurance Corporation (K-Sure) when signing the second execution contract. The K-9 self-propelled howitzer contract is to be finalized by June, and the Chunmoo by November.
On the 24th of last month, at the Anheung Test Site of the Defense Science Research Institute in Taean-gun, Chungnam, the Polish-type Cheonmu HOMAR-K launched a guided missile with a range of 290 km during a test firing. [Photo by Hanwha Aerospace]
Poland, which has signed arms contracts worth tens of trillions of won with Korean companies, needs to secure loans with even a 1% lower interest rate to reduce its burden. This financial contract aims to secure conditions to receive low-interest loans backed by policy finance institution guarantees from Korea, an arms-exporting country, and then find lenders through a bidding process among various financial institutions, including those in Europe. For defense contracts worth trillions of won, a 1% difference in interest rates can mean hundreds of billions to trillions of won in difference.
From the companies' perspective, time is pressing. If the deadline is missed, the second contract worth trillions of won will be automatically terminated. KEXIM has about 1 billion dollars (approximately 1.4 trillion won) in remaining support funds, and K-Sure has no upper limit on support amounts and thus has capacity, but the Ministry of Economy and Finance, which holds the authority to decide on fund execution, only tells them to wait, according to industry claims. Hyundai Rotem is currently negotiating a second contract for K2 tanks with the new Polish government. The defense industry interprets that if Hyundai Rotem signs a second contract with Poland, the government will provide comprehensive support. If the contract with Hyundai Rotem is delayed, it could affect Hanwha Aerospace's contract.
This is because it takes time to increase capital for KEXIM. Although the recent amendment to the KEXIM Act increased its equity capital by 10 trillion won, it is injected at 2 trillion won per year. It means it will take five years for KEXIM to receive the full amount. Until then, the remaining funds must be divided and executed. Because of this, there are concerns that if limited policy finance support is concentrated on Hanwha, which signed the contract first, there may be insufficient support capacity for Hyundai Rotem.
The government also has internal reasons for not making a quick decision. It must set support standards that suit its circumstances without losing the initiative to the arms purchasing countries. A researcher from a government-funded research institute, who requested anonymity, said, "Defense companies just sell weapons, but in reality, large corporations generate profits with the government involved, so the government must bear the risk," adding, "There are various concerns about whether it is appropriate to standardize the current situation of the defense market, which has suddenly expanded due to prolonged war, and prepare financial support measures, and whether policy sustainability can be maintained at our current capital level." He described the situation as "being cornered by recklessly enduring for exports."
He said, "Although arms exports are generally conducted through government-to-government (G2G) contracts, the purchasing countries also need to bring some equity capital, but their dependence on our government has become too high, and a special law must be enacted to provide a kind of special benefit for certain countries."
He added that if special benefits are given to country A, it sets a precedent, raising the question of how to respond when countries B, C, and D make similar demands. He said, "Countries like Indonesia might hold out at the last minute, saying they cannot pay," and noted, "In fact, the situation is similar for other small and medium European countries except Germany and France." He also mentioned, "There is criticism that support is being concentrated on large defense companies, so the authorities bear a heavy burden."
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