Several blows have knocked the Philippines' economy since the Asian crisis in the late 1990s. This year the crop of economic woes includes some old problems and some new ones.

While fewer traders and bankers are prepared to do open account business with business partners in the Philippines, the availability and pricing for letter of credit (L/C) business remains relatively constant.

Trading woes

The Philippines' key business sectors have not had a good year so far. Tourist arrivals were down 12 per cent in the first five months of 2003, a combined product of concerns over the war in Iraq, a worldwide slowdown in the travel industry and fears over severe acute respiratory syndrome (SARS) in the region.

Exports had a weak start this year for much the same reasons. With weak export orders and rising imports, the country suffered a trade deficit of US$503 million in May.

Ratings downgrades

On the home front there are fears of political stability. Coup rumours, triggered by the disenchantment among young officers, who have since abandoned their protest, has added to the instability. This helped restabilise the Philippine currency after it fell to a four-month low against the dollar.

Downgrades from ratings agencies have materialised from Standard and Poor's and Fitch, the latter of which blamed a material deterioration in sovereign creditworthiness and a 500 per cent government debt/revenue ratio for dragging the country's economy into the mire.

Constant L/C pricing

Despite this year's economic woes, Australian trade bank, Westpac Banking Corporation, says it has not changed its L/C confirmation pricing from 2002. Standard pricing in Australia is around 125bp per annum for top tier banks with keener pricing for larger or strategic experts according to a bank official. London-based trade financiers in late 2002 suggested similar rates of between 100-125bp.

While confidence remains in bigger deals with stronger banks, it seems that smaller traders and financiers are paying steeper prices. Pricing for second and third tier banks ranges from 1.5 to 2 per cent and sometimes rises as high as 2.5 per cent for smaller or weaker Philippine banks according to an Australian financier.

L/Cs preferred

Australia's Export Finance and Insurance Corporation (EFIC) has put the country on its "watch list" and it will still consider some open account deals, but only after taking into account issues such as buyers' capacity to withstand peso volatility, their market position and debt burden.

In a statement EFIC says it prefers transactions involving L/Cs, especially for 90 day plus credit terms.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.