Unexpected S. Korea's key interest rate raise endangers STX deal loan terms

Unexpected S. Korea's key interest rate raise endangers STX deal loan terms S.Korea unexpectedly raises key interest rate

South Korea's central bank Friday unexpectedly raised the key interest rate from a record low in a bid to restrain inflation as Asia's fourth largest economy posts a solid recovery.

Contrary to widespread predictions, Bank of Korea governor Kim Choong-Soo and other policymakers increased the benchmark seven-day repo rate for July from 2 percent to 2.25 percent -- the first rise since August 2008.

As the global financial crisis hit, the central bank cut rates by a total of 325 basis points between October 2008 and February 2009.

It now joins a series of Asian central banks trying to curb price rises as the region leads the global recovery.

Although future rate rises are expected it would be done in a way that would not hurt growth, Kim said.

But, in Ghana the implications of the raise in Korea's equivalent of the Bank of Ghana's prime rate cannot be lost on legislators who are holding a special debate Monday over the country's single largest borrowing ever, a $1.5 billion supplier credit facility with Korean conglomerate, the STX Group, through its Ghanaian subsidiary.

Although, the actual source of funding is not yet certain, inconclusive documents presented to Parliament suggest that Woori Bank of Korea and/or the Korean government are the main sources of funding targetted by STX for the construction of 30,000 housing units for Ghana's security personnel.

The terms of the controversial $1.5 billion credit facility meets Ghana's concessionary requirement. With a repayment period of 15 years it comes with a fixed interest rate of 2% per annum.

This low interest rate, according to financial analysts contacted by the Danquah Institute, was set based on the prevailing base rate of South Korea's central bank, which was 2%.

According to Ouborr Kutando, analyst at the Danquah Institute, "this new raise in Korea's interest rates adds more bite to those calling on Government to open its search for funds to tackle the housing deficit to competitive bidding."

Mr Kutando adds, "For instance, on Thursday, the United Kingdom kept its interest rate at the record low rate of 0.5% and the European Central Bank, which sets monetary policy for the 16 countries in the euro zone, left its benchmark interest rate at the record low of 1 percent, where it has been for more than a year."

Most economists do not expect rates in Europe to rise until well into 2011, and would have been shocked had the UK's central bank taken action Thursday. Similarly, economists do not expect the Bank of England to move until the beginning of next year at the earliest.

Last Thursday, DI released its damning analysis of the report of the Parliamentary Select Committee on Finance which on the previous day, recommended the $1.5bn facility to the House for a resolution.

Although the terms and conditions of the STX agreement are laid out in certainty, DI points out that sources of funding, according to the report, are far from certain.

So, who is providing the $1.5 billion supplier's credit facility? In spite of the agreement describing STX Ghana as lender, STX Ghana is, in fact, merely an on-lender to the borrower - the Government of Ghana.

According to DI, the provider of the funding should be part of the agreement with the Government of Ghana and should undertake to do so.

"It is difficult to accept the claim that due diligence have been conducted on this facility without any clarity on the ultimate source of funds for this project. For Parliament to approve this deal is as good as offering a blank cheque of a Sovereign Guarantee to STX with which it can go shopping for funds," DI says.

The policy think tank asks, "So in the absence of clarity on itemised sources of funding, what weight can be placed on the terms of conditions provided by STX even if they do meet concessionary requirements?"

The report makes it clear that the demand by members of the Committee "to be sure that the Government of Korea was actually backing the project" was not satisfied. It reads, "To this end, the Ministry of Finance & Economic Planning presented to the Committee a letter from the Korean Ambassador to Ghana indicating that the Korean Government has identified the Global Infra Fund as part of the sources from which the Korean Government is supporting the STX Group," the company that has 66.96% shares in STX Engineering & Construction Ghana Ltd.

Checks made by the Danquah Institute have so far drawn a blank on any information about this so-called Global Infra Fund. It would be helpful to know if this is a new sovereign fund apart from the established sovereign wealth fund of South Korea, known as the Korea Investment Corporation, Di says.

Officially, DI says they are being told that the Global Infra Fund is fairly new with hitherto limited resources to support the investment drive of Korean companies.

Also, the Ambassador's letter made it known that the support would be for the STX Group, which has several other subsidiaries which it may seek to support from its share of the nascent Global Infra Fund, as well, including STX Finland Oy, which was compelled to fire its President, Martin Landtman, just this week, in its efforts to "improve the situation for the company in a challenging economic environment."

The letter from the Embassy made no categorical claim that the Korean Government was directly going to invest in the $1.5 billion Housing Project in Ghana and by how much as has been claimed recently by both the CEO of STX Ghana, B K Asamoah, and the Chief of Africa Division of the STX Group, Kim Yong-Chan, who maintain that the Korean Government is to fully fund the $1.5 billion credit facility for the Ghana Housing Project. The Ambassador's non-committal letter also confirms the statement from Park Young June, Vice Minister at the Office of the Korean Prime Minister, who visited Ghana recently that his Government "might" support the Ghana Housing Project, according to his translator.

In fact, the Korean ambassador only sought to argue that the STX Group, backed with Ghana's sovereign guarantee, can raise the money from the capital market: "Messrs STX Business Group, which is the Korean partner of the STX Engineering & Construction Ghana Limited, is a good standing conglomerate group in Korea. Since its current financial standing is over US$25 billion turnover per annum, it is eligible to obtain any credit facility without Korean Government support in Korea and any part of the world. It is particularly so when the repayment is well guaranteed by the Government of Ghana, which is prerequisite for acquiring credit facility for the project."