Letter of credit (L/C) arrivals in Korea have been in freefall for 15 months according to figures released by the country's central bank.

The level of L/C arrivals has conventionally been interpreted as a key indicator of Korea's future export performance. This convention is now however disputed by government officials.

Decline

The Bank of Korea reported a 28 per cent fall in L/C arrivals during March this year compared with the same month last year. After a continuous decline lasting 15 months, the value of L/C arrivals in the month was US$4.3 billion.

The central bank has now reported double-digit falls on year-on-year basis since September 2001 when a 15.1 per cent fall was recorded. A 23.8 per cent drop in October and a fall of 11.7 per cent in November followed. In February 2002 the central bank reported levels of L/C arrivals had fallen by 30 per cent.

Under question

Around 30-40 per cent of Korea's exports are settled by L/C and levels of L/C arrivals roughly point to export trends over the following three or four months, according to the Bank of Korea.

The Ministry of Commerce, Industry and Energy however now questions the reliability of L/C arrivals as a leading indicator of export performance three to four months ahead. The ministry argues that the proportion of L/C-settled export transactions is diminishing against total exports.

Statistical evidence

The ministry has presented statistical evidence that it says shows that L/C supported exports are becoming less common.

According to the ministry, the level of L/C arrivals has contracted 5 per cent over the last year and that with the exception of 2001, L/C usage has been in decline since 1996. In 2001, L/Cs accounted for 36 per cent of Korea's total exports, in 1996 - the year the decline started - more than 53 per cent of exports were L/C-backed.

Proportionate decline

The proportion of L/C supported exports to total exports continued to decline to 49.7 per cent in 1997 and had fallen to 35.8 per cent in 2000.

The bottom line according to the ministry is that this year, although L/C arrivals up until 20 March were down 20.5 per cent on the same period in 2001, total exports were only down 10.1 per cent.

"L/C arrivals can no longer be seen as a leading indicator of future exports since a substantial proportion of exports are being made without them," said a ministry official.

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