[ 2010-07-11 ]

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

Source - Gabby Asare Otchere-Darko

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