Export Finance-Issues and Directions Case Study of the ... · I I~~~ o ir-I INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER INDUSTRY SERIES PAPER No. 42 Export Finance-Issues and Directions

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INDUSTRY AND ENERGY DEPARTMENT WORKING PAPERINDUSTRY SERIES PAPER No. 42

Export Finance-Issues and DirectionsCase Study of the Philippiries

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December 1990

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EXPORT FINANCE--ISSUES AND DIRECTIONSCase Study of the Philippines

December 1990

Yung Whee Rhee, Kevin Young, and Eva Galvez

Industry Development DivisionIndustry and Energy DepartmentPolicy, Research and External Affairs

TABLE OF CONTENTS

Page No.

I. INTRODUCTION AND SUMMARY ............................. 1

A. Introduction ......................................... 1B. Summary of Findings ................................... 2C. Unique Characteristics of Trade Finance

Market Mechanisms ............. ...................... 6D. Summary of Suggestions ........... ...................... 8

II. CENTRAL BANK EXPORT LOAN PROGRAM .................... 11

A. Interest Rates .............. .......................... 11B. Procedures . .......................................... 11C. Composition of EPLs .................................. 12D. Major Issues . ........................................ 12

Ill. OTHER EXPORT FINANCE SCHEMES .17

A. PITC Schemes ......................................... 17B. Export Industry Modernization Program ...................... 17C. LIVECOR's WC Financing Program ........................ 18D. The Philippine National Bank's International

Trade Financing Program ........... ..................... 18E. IGLF Scheme ......................................... 18F. Trade Facility ...... ................................. 18G. Summary of Other Schemes ......... ..................... 19

IV. PRESHIPMENT EXPORT FINANCE GUARANTEES .20

A. Export Credit Guarantee Program for Small andMedium Industries .............. ...................... 20

B. Guarantee Program Supported by USAID .................... 22C. Magna Carta for Smal Enterprises ......................... 23D. Direction of PEFG Reforms ......... ..................... 23

Yung Whee Rhee is a principal economist in the Industry Development Division, Industry and Ener¢yDepartment, Policy, Research and Extemal Affairs, and Kevin Young is a principal economist iii theIndustry and Energy Operations Division, the Country Department II, Asia Region of the World Bankand Eva Galvez is a consultant The field work for this study in the Philippines was carried out duringthe latter half of 1989. The draft report was discussed with the Government in March 1990. Wordprocessing support was provided by Wilson Peiris and Anna Marie Maranon (IENIN). Editorial assistancewas provided by Stephanie Gerard. The views presented here are the authors' and do not necessarily reflectthe views of the World BanL

Table of Contents (Contd.)

Page No.

V. INTERVIEW RESULTS ON EXPORT LOAN ACCESS PROBLEMS ...... 25

A- Access to Various Export Finance Instruments .... ............. 25B. Relative Importance of Various Export Finance

Instruments ............. ............................ 29C. Collateral Requirements ................................. 29D. Lost Export Opportunities ............................... 30

VI. IMPORT FINANCING FOR EXPORT PRODUTION .34

A. Export Manufacturers Sample Survey Results .34B. Estimates of Import Financing Needs in the

Next Three Years .36C. Need for Foreign Currency Revolving Fund .36

VII. EXPORT FINANCING FOR DOMESTIC COMPONENTS ANDINDIRECT EXPORTERS .43

A. Export Loan for Domestic Input Purchase .................... 43B. Export Loan for Value Added ............................ 43C. Export Loan for Indirect Exporters ......................... 44D. Introducing Export Finance System for

Indirect Exporters .47

VIII. POSTSHIPMENT EXPORT FINANCING AND EXPORT CREDITINSURANCE/GUARANTEE .49

A. Sazrvey Results on Methods of Payments for Export .... .......... 49B. Export Credit Insurance/Guarantee ........................ 50

ANNEXES

I. M ;or Financing Programs for SMEsII. C *arantee Issues of Philguarantee and USAIDIII. Characteristics of Sample Firms and Their Export Finance InstrumentsIV. Framework for Estimating Costs Savings of Foreign Currency Loan Scheme

REFERENCES

GLOSSARY OF T`tCHNICAL TERMS

I. INTRODUCTION AND SUMMARY

A. Introduction

1.01 In sequencing policy reforms in developing countries, governments should assign a high.priority to measures that assure rational regimes for export activities.Y For policy reforms to have asignificant impact on growth, foreign demand for export products must be matched by active supplyresponses from exporters. External demand for export products takes the form of letters of credit (L/C),that is, payment for export orders is guaranteed by the importers' banks. Thus, an export L/C amounts toa sales agreement. But without access to financing needed to fill export orders, exporters' supply responseto foreign demands cannot be realized.

1.02 Trade financing mechanisms taken for granted in industrial countries are rudimentai, ornonexistent in much of the developing world. This limits export manufacturing to larger, established firmsthat have collateral for working capital loans. Lack of trade finance is a barrier to smaller or new firmsthat might well be able to fill export orders and foreign contracts if financing were available. Therefore,assuring access to trade financing for all activities that generate export value added--including those by small,infant, or indirect exporters--is one of the critical elements of an outward-oriented development strategy.Y

1.03 Accelerating and sustaining the growth of exports is fundamental both to carrying out anoutward-oriented development strategy in the Philippines and to providing foreign exchange for debt serviceand for import needs. Realizing the critical role of trade financing for export activities in the Philippines,we carried out a study on export financing in 1989. This paper summarizes the findings of the study.Y

1.04 The focus of the study was to identify factors constraining access to export finance atreasonable cost. It is based on a survey of exporters and commercial bankers, geared to providing anempirical and analytical basis for reforming the export financing system of the Philippines.

1.05 Section B of this chapter provides a summary of the findings of the study; Section Cdescribes the characteristics of trade finance market mechanisms. Chapters II and III review the exportfinance systems of the Central Bank and other government agencies, while Chapter IV reviews preshipmentexport finance guarantee schemes. Chapter V presents interview results on export loan access problems.Chapter VI discusses the need for creating a foreign currency revolving fund, while Chapter VII discussesthe need for re'orming the preshipment export finance mechanisms and extending ccverage to indirectexporters. Chapter VIII discusses the role of export credit insurance/guarantee.

B. Summary of Findings

Current Status of Export Finance

1.06 Preshipment Export Finance. Preshipment export financing covers production financing forexport manufacturers and inventory financing for trading companies. Production financing can be furtherclassified into:

1/ See Cooper (1987).

j See Rhee (1989a) for the critical role of the trade finance systems in outward-oriented developmentstrategies of developing countries.

See World Bank (1987) for an earlier work on export finance in the Philippines.

* financing for imported inputs for export production

* financing for purchase of domestically-produced inputs and

* financing for value-added components of export proddction.

Also, financing for indirect exporter.; (i.e., producers of domestically-produced inputs) must be included inpreshipment export financing. At present, the most important export financing scheme in the Philippinesis the Central Bank's rediscount window, which redisccunts short-term working capital exprt loans.

1.07 Commercial banks are the retail banks for these CB-rediscounted export loans. CBrediscounts 80% of preshipment working capital export loans and 100% of postshipment working capitalexport loans. Interest rates charged to the retail banks and to the exporters are market based. About 99%of the outstanding CB loans are for preshipment finance and are called "export packing" loans (EPL).

1.08 During the 1980s, there was a niajor decline in the scope of the CB export loan rediscountprogram. For example, CB export loans outstanding declined from 14% of export value in 1982 to just1% in 1986-88. The decline in the ratio of loan amounts granted to export value ratio is even morestriking--from 55% in 1980 to a mere 4% in 1987-88.

1.09 This extremely loN export loan coverage suggests that only a limited number of exportershave access to the export loan redibcc.nt scheme--CB data indicate fewer than 500 exporters out of about6,000 direct exporters. This situation in the Philippines compares quite unfavorably to many otherdeveloping countries. The low coverage also suggests that the numerous small and new exporters, inparticular, experience difficulties obtai! 'ng such loans due to their lack of coUlateral and short-term trackrecords. Philippine export loans (EPL or non-EPL trade finance) are basically credit line and colateral-based loans rather than purely export (and associated import and domestic purchase) transaction-basedtrade flnancing. In fact, exporters say that the value of physical colateral is the only factor determiningthe credit line of a firm.

1.10 Indirect exprters Y are not eligible for the CB's preshipment export finance window eventhough they are several times more numerous than direct exporters. This failure to assure equal access toworking capital financing for indirect exporters hinders the development of backward linkages as well asdevelopment of trading companies (which would allow for more efficient specialization, not only in productsbut also in processes and activities, including overseas marketing). In 'ight of the need to promotebackward linkages aggressively in such leading export sectors as garments, textiles and electronics, efficientmechanisms for providing equal export incentives to indirect exporters are needed. Such a mechanism wouldbe the domestic L/C (see paras. 1.28 and 2.11).

1.11 In addition to the CB export loan rediscount scheme, there are a number of other schemesfor smal and medium exporters. These include: PITCs Ten Milion Peso Scheme and Import DepositScheme, the TLRC Export Modernization Program, LIVECOR's LVC Financing Program, PNB's TradeFinancing Program, the export window of the IGLF scheme, and the CB Trade Facility (see Chapter III).

1.12 These various export loan support schemes undoubtedly have been important for selectedexporters who otherwise would have had difficulty meeting their financing needs. However, the total amountof loans granted under these schemes does not appear to cover even half a percent of the total export valueof the economy or the total value of goods exported by a few hundred top exporters. Furthermore, it

41 Le., output-supplying firms that supply finished export commodities to trading companies as welas input-supplying firms that supply intermediate inputs to the final stage export manufacturers.

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does not appear that establishing many schemes by d;,Terent nublic agencies is the most efficient way to dealwith the access problem.

1.13 Establishing import L/C confirmation through the CB Trade Facility might once have beenimportant to recover the confidence of foreign suppliers. The import VJC deposit support scheme has alsobeen critical for some small exporters. However, these support schemes for import L/Cs can hardly be consi-dered an export financing system in a conventional sense. Furthermore, more efficient ways must be soughtto address the strict commercial bank practice of requiring a 100% prior deposit from small and infantexporters' who want to open back-to-back import LJCs.

1.14 Preshlpment Export Finance Guarantee. In most developing countries, heavy collateralrequirements by commercial banks are the major impediment to wider access (especially by smaRl and newexporters) to export financing. An instrument that has evolved in a number of successful exporting countr-ies tc address tW'~ problem is the preshipment export finance guarantee (PEFG) scheme. Its objective isto provide a co..aieral substitute by protecting commercial banks' preshipment export loans againstexporters' default risks. This should be carefully distinguished from an export credit insurance/guarantee(ECI/G) scheme, which protects eI-n-ters/commercial banks against non-payment risks by foreign buyers.

1.15 The Philippine Government has operated a few versions of the PEFG scheme, for example,through the Export Credit Guarantee ?rogram for Small and Medium Industries (ECGP-SMI) administeredby Philguarantee (Philippine Export and Foreign Loan Guarantee Corporation). Coverage of the ECGP-SMI is P5 million, and the maximum guarantee coverage is 70% of the approved loan. To qualily for theECOP-SMI faility, borrowers must have: (a) a three-year track record of exporting priority non-traditionalexport products; (b) an average profit margin of 10o; (c) an average return on equity of 15%; (d) anaverage current ratio of 1.5 to 1; and (e) an average debt-to-equity ratio (net of valuation increment) of75% to 25%.

1.16 Small and medium-scale exporters are eligible for the facility. However, Philguarantee hasnot been able to develop this as a significant guarantee instrument. Its insignificant role is evident in thefact that only 15 exporters and less t.Oan 2% of the CB export loans were covered by the guarantee systemin 1988.

1.17 Key factors limiting the effectiveness of the ECOP-SMI facility appear to have been:

* lack of sustained commitment by the Government;

* lack of credit standing of Philguarantee, stemming from earlier problems with overseasconstruction project guarantees; and

* flaws in the basic technical and operational approach, which applied stringent eligibilityrequirements.

These criterial have resulted in excluding those exporters who were the true target group i.e., those whocould not obtain export loans withoul he PEFG. As such, these procedures appear to have established 'norisk taking' as the guiding principlf is basically contradicts the true task of the PEFG, which is to cover'non-performance risk of all expor-. ho have confirmed export orders, excluding only those firms thathave an "export loan misuse risk."

1.18 USAID administers another guarantee scheme. Under this program, four major Philippinebanks are provided 50% guarantee coverage on their loans to small and medium enterprises in exports oragriculture up to a total guarantee ceiling of US$2.4 million for each bank. The U.S. bank handling theprogram opens a stand-by LJC up to the above ceiling for the benefit of ile four participating Philippinebanks.

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1.19 The most important lesson t. be learned from the USAID program is that its automaticguarantee covcrage and guarantee psyment have made the scheme operative and popular among exportersand bankers. Also, the administrative simplicity has contributed to the attractiveness of the program. Themajor drawback of the program is its ad hoc nature. Si,ice it is not a program designed to build a PEFGinstitution, the sustwiiability of the scheme is uncertain. Also, it is difficult to determine whether theprogram has generaw. tdditional exports by making loans that might not have been possible without theprogram. Due to lack of a mechanism to restrain other collateral requirements, it is unclear whether thePhilippine banks simply use the program as additional protection beyond their normal collateralrequirements.

1.20 Another initiative with possible relevarce for export guaranty is the proposed "MagnaCarta for Small Enterprises" 'egislation, which has a scope much broader than the export sector. However,at this stage it is unclear how the PEF5 function would fit into a comprehensive design of the smallenterprise finance guarantee system. Laorting out these institutional arrangements is clearly a priority matter.

1.21 Direction of PEFG Reforms. In reforming the PEFG system of the Philippines, thefollowing objectivcs, based on past lessons, should provide a basis for setting a new direction:

* The focus of the PEFG institution has to shift from a 'no-risk' approach to one covering"non-performance risk" of all exporters.

* The system should cover all exporters with confirmed export orders and without past loandefault records and should incorporate automatic payment, and administrative simplicity.

* A comprehensive approach should replace the current ad hoc piecemeal approach.

* The current export finance disbursement and liquidation mechanisms need to be reformedto provide built-in safeguards against potential misuse of export loans.

* A reformed PEFG facility will need to establish its credibility with the financial sectoi bothin terms of a strong financial base and in willingness to pay claims promptly.

1.22 Import Financing--Need for a Foreign Currency Loan Scheme. It is conservatively estimatedthat for 1990, import financing of about US$409 million (outstanding) would be required to ensure importedinputs for use in export production. In this context, one of the major issues in the Philippine exportfinance system is the absence of a foreign currency loan (FCL) scheme to support import financing needs.In contrast, successful exporting countries assure automatic access to an FCL scheme for their exporters.N'

1.23 In the Philippines, there are at least three major reasons why the establishment of an FCLscheme for exporters is critical:

* First, exporters' import financing costs would be significantly reduced.

* Second, implementation of an FCL scheme would be a first step toward developing a truetransaction-based export financing system.

In various countries with scarce foreign exchange, foreign currency revol'ing funds were created withthe assistance of the World Bank, e.g., in Costa Rica, Mexico, Guyana, Jamaica, Zimbabwe,Yugoslavia, and Bangladesh.

Third, an FCL scheme, supported by a foreign currency revolving fund (FCRF), wouldeliminate the uncertainty of eporters' access to foreign exchange, which could arise froma future foreign exchange crisis.

1.24 Potential cost savings of an FCL. Taking into account the lower nominal interest ratespossible with FCL loans, the foreign exchange transaction costs of local currency loans, and possiblecurrency depreciation, it is roughly estimated that an FCL scheme could result in a net import kinancingsaving of US$25-40 million based on the estimated im1 .-t level for 1990. This would effectively reduce theimport cost by the equivalent of about 1.5%-2.4%--a significant cost saving. Strong support by exportezsfor an FCL scheme is, more oI less, based on their feeling that such cost savings can be realized under anew scheme.

1.2 A further significant cost saving could be achieved by simultaneously implementing moderndisbursement mechanisms within the FCL scheme. Such mechanisms, with an effective guarantee, wouldmake it possible to reduce the annual effective import loan periods substantially--up to 50% under typicalassumptions about turnover and export cycles. This could save up to an additional US$30 million in importfinance costs per year. Only part of these savings would be needed to support an effective PEFG schemeand thus, on this basis alone, the scheme would be very cost effective.

1.26 Financing Domestic Inputs and Value Added. Once import financing for export productionis separately instituted under an FCL scheme, and supported by a foreign currency revolving fund (FCRF),the remaining export financing would go toward domestic expenditures for export production. To institutetransaction-based export loan disbursement niechanisms that are parallel to FCL disbursement me.hanisms,it is necessary to separate export loans for the purchase of domestic inputs from exports loan for value-added components. This separation is also critical for extending coverage to indirect exporters. It wouldallow synchronization of export loans for domestic input purchases with the export loans for inputsmanufactured by indirect exporters.

1.27 Extending Export Finance to Indirect Exporters. The Philippines has not yet developedextensive backward linkages based on high volume export items, unlike the successful East Asian countries.For example, the Philippine textile sector, which has a large production capacity, has not been significantlyintegrated into the garment export industry, either directly or indirectly. That so many small and mediumdirect exporters have been exporting without i iuch help from trading companies, and that a large potentialfor backward linkages from the major manufactured export items has not been exploited, clearly suggestthe large contribution that small and medium producers could make to the acceleration of non-traditionalexports (see para 1.10). In this regard, a finance scheme for indirect exporters and subcontractors unableto obtain suppliers' credits is a priority matter.

1.28 To implement this objective, the rules and regulations of the EPL need revision to includeindirect exporters. It is recommended that the Central Bank design an eflcient administrative instrument,such as the domestic letter of credit (DL/C) system, that would provide automatic modernized mechanisms.Based on these, indirect exporters would have direct access to the EPL, and commercial banks could manageindirect exporters' access without much difficulty. One important additional advantage of the DL/C systemis that it can be an effective instrument for administering the other export incentives for indirect exporters,in particular access to duty-free imports.

1.29 However, it should be noted clearly that the introduction of a modern instrument such asthe DL/C system can hardly be successful unless the administrative arrangements for the EPL aremodernized by linking the loan disbursement mechanisms with the import L/C and DLtC negotiations. Suchmechanisms would not only save the CB funds for preshipment export loans but also contribute significantlyto effective management of PEFG operations. Since PEFG operations will also be closely related to thespecific administrative arrangements for CB preshipment export loans, it is strongly recommended that theGovernment take an integrated approach in designing these schemes. Furthermore, the modernized export

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financing procedures and mechanisms would provide the basis for streamlining the duty-free importadministration.

Postshlipment Export Finance and Credit Insurance/Guarantees

1.30 The main method of payment for the majority of Philippine exporters (other thanconsignment exports of garment and electronic products) has been sight L/Cs. This is confirmed ininterviews with exporters and by ahe fact that only about 1% of the total CB export loans (outstanding) arefor postshipment finance. This suggests that an export credit insurance and guarantee system (ECI/G) thatcovers exporters and banks from overseas buyers' non-payment risk may not have a high priority at thispoint.

1.31 However, it should not be overlooked that the information tunction of an ECI/G agencyfor the whole export community is as vital as the risk-pooling function for the success of ECUO operations.Even though creation of an ECI/G may not be so urgent as having an effective PEFG scheme, there is noquestion that demands for ECUG activities, including services to provide information on overeas buyers,will increase as the export structure becomes more sophisticated and as more active export marketingefforts are pursued.

C. Unique Characteristics of Trade Finance Market Mechanisms

1.32 Trade finance mechanisms are a kev element of financial market development. In general,the following three factors impede the development of market mechanisms in the financial sector of mostdeveloping countries:

* First, uniderdevelopment of financial instruments.

* 'second, financial institutions' lack of skills and capacity to deal with imperfect informationon loan applicants and their lack of capacity to internalize risk taking.

* Third, financial repression characterized by excessive control and regulation of the publicagencies.

The detailed nature of these three factors and the direction of reforms are very different between tradefinancing and other financing (such as investment financing, general overdraft, and general working capitalfinancing).

Trade financing is fundamentally different from other types of financing because it is:

* trade transaction-based* self-liquidating and* short-term v orking capital financing.

These special featur% of trade financing help to clarify why it is inappropriate to include trade financingin very loosely termed "sectorally targeted" loans. First, trade finance is neutral with respect to particularproductive sectors. Second, if "sectorally targeted" loans are meant to imply government controls that retardmarket mechanisms in the financial sectof, then the opposite is the case as far as trade finance is concerned.The precise objective of designing the separate legal and institutional framework for trade transaction-based, self-liquidating trade finance mechanisms is to develop trade finance market mechanisms. The Billof Exchange Act of the United Kingdom enacted in 1882 was designed to set the regulatory framework fortrade bill financing, which was the origin of trade finance market mechanisms. Similarly, the objective of

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the bill rediscount mechanisms instituted in the Federal Reserve system of U.S. in 1900 was to developtrade flnance market mechanisms.

1.34 !t is generally agreed that government's excessive control of loan allocation and interestrates, especially - terest subsidies to select users at the expense of savers, has been harmful to thedevelopment of financial markl" :_echanisms. On the other hand, the new theory of loan markets pointsto market failures stemming im imperfect information, particularly in LDCs.§f These two separate aspectsof public and private failures need to be carefully examined in designing an ideal mix of public and privatemechanisms for LDCs. Two points are important in this regard. First, the negative experience of regulatingthe "interest" regime should not be confused with the desirability of designing mechanisms for "access" inan LDC. Second, oversimplification, by including different fnance mechanisms into one, should be avoided.

1.35 The necessa- -stitutions and instruments for trade financing market mechanisms are:

* Modern banks with capacity to internalize risk-taking

* Credit instruments associated with trade transactions (such as LJCs and accepted trade bills)

* Bankers' acceptances (BAs) Y created by modern banks and based on credit instrumentsassociated with trade transactions (in return for a BA commission and discount) and theself-liquidating nature of the L. de transaction

* Money markets that make investors' short-term excess liquidity (rather than the banks' ownfunds) available to finance trade transactions. (The ultimate holder of a BA finances thetrade transactions, while the BA market and the bank are intermediaries.)

* A lender-of-last-resort facility of a central bank--that is, a BA rediscount facility--as asupplementary source of funds for trade financing.

1.36 Modern banks that can internalize risk-taking are the most critical institution in market-based (i.e., BA market-based) trade financing. Without such banks, BAs cannot be created and moneymarket investors are not interested in purchasing BAs in the market, even if the credit instrumentsassociated with trade transactions (such as L4Cs and accepted trade bills) are available and trade financingis self-liquidating. If a bank cannot internalize risk-taking, its role as the BA creator might be ineffective.Management worries whether the traders will perform (for example, whether the exporter will be able tomeet an export order on time with quality pwoducts). It also worries about the buyer's ability to meet thepayment agreement, just as the BA investors worry about the credibility of the BA created by the bank.Early merchant banL, in England did not have such reservations about traders and buyers, and investorswere confident about banks' financial and information resources accumulated through trade activities.

137 It is important to understand the unique nature of the trade finance market mechanism inthe BA market, which is part of the money markeL To have access to short-term liquidity to satisfy tradefinancing needs speedily through the BA market, traders and banks create BAs in such a way that theirtiming, amounts, and maturities precisely match the actual payments and credit needs of a particular tradetransaction. Specifically, they are structured to minimize the costs to traders (of holding cash reserves)and the risks to banks. Money market inves'- rs (financial institutions, firms, and individuals) demand lowrisk and highly marketable income-bearing sh ,..-term credit instruments, such as BAs in the money market,

§/ See Stiglitz and Weiss (1981) and Stiglitz (1989).

y' BA is an unconditional promise to pay a certain sum of money at a definite future date to thebearer of the BA.

to keep their cash holdings at the minimum ccnsistent with their working capital needs. Among all thenoney market instruments, a preference is given generally for BAs in central bank rediscounting in OECD

countries. The intention is to provide speedy access to trade financing (at a prevailing BA discount ratethat is normally lcwer than a bank loan interest rate) for all traders, because such access generates realgoods and services without inflation. This is historically evident in the rediscounting practices of the Bankof England and the Federal Reserve system of the U.S. under the "real bills doctrine."

1.38 The money market instruments in developed countries today include not only BAs but alsotreasury bills, commercial paper, and negotialMc certificates of deposits. But even developing economies thathave most of tile various short-term credit instruments for the money market do not yet have a BA market.The main reason that developing economies lack BA market-based trade financing mechanisms (with thepossible exception of Hong Kong) is tha; their commercial banks lack the capacity to internalize risk-taking.These banks have neither accumulated financial resources nor established information networks similar tothose of the British merchant banks in *!e 19th century. Further, unlike British commercial banks, in mostdeveloping economies the discounting ui trade bills has never been important for commercial banks.

1.39 In sequencing measures to achieve the long-term goal of deveir ng truly market-based (i.e.,BA market-based) trade financing mechanisms, LDCs can benefit from the experience of the developedcountries and NIEs in which a critical role was played by the central banks and other public agencies. Itis also essential that LDCs distinguish trade finance market mechanisms from the other finance marketmechanisms. Without developing trade finance instrumentv (such as L/Cs and BAs), institutions (such ascommercial ban,.s, discount houses, central banks and guarantee agencies), and mechanisms (i.e., tradetransaction-based self-liquidating mechanisms), no LDC can expect to develop an adequate trade financemarket.

1.4t The proper leadership role of public agencies in developing these trade finance instruments,institutions, and mechanisms is critical.Y' Developing modern loan-based trade finance meclanisms wouldbe the most feasible first step to developing a trade finance market, as well as the best way to meet theneeds of an outward-oriented development strategy.

D. Summary of Suggestions

1.41 This report recommends that priority attention be given to implementing a modernizedsystem of export finance in the Philippines. To guide its design, the following basic objectives shouid beadopted for the export finance system:

* Universal co; _ rage of all exporters and indirect exporters with valid export orders, excludingonly those with records of default or credit abuse

* Full coverage of exporters' preshipment finance requirements

* Finance at competitive rates and terms

* Efficient approval and disbursement mechanisms to minimize loan terms and increas'. loansurety.

See Rhee (1989a) (1989b) for the lessons to be learned from the critical role of the public agenciesin developing the trade finance market mechanisms in U.K, U.S., Japan, and NIEs. See alsoGoodhart (1988) for a review of the role of the central banks in the developed countries in tradefinance and other financial developments.

1.42 To achieve these objectives, specific reforms are suggested in the following areas:

1. Preshlpment Finance. Top priority should be the establishment of a modernized andcomprehensive system of preshipment export finance, including the following key elements:

* Set up a foreign currency loan (FCL) scheme based on a foreign currency revolving fund(FCRF). This scheme would cover the import finance requirements for exporters. In viewof the Monetary Board's decision to reduce the CB's role in credit programs, the schemecould be operated by a designated wholesale bank such as the Development Bank of thePhilippines (DBP).

* Implement modern disbursement mechanisms for the FCL scheme. This would be doneby requiring only back-to-back L/C-based trade financing.

* After establishing an FCL scheme for import financing, establish the system for theremaining export financing for domestic purchases (inputs and value-added). The domesticinput financing should be transaction-based, using parallel disbursement mechanisms to theFCL

- Extend the system to cover indirect exporters. This would require the design of an efficientinstrument such as the domestic letter of credit (DL/C). This would give indirect exportersaccess to export finance and give the commercial banks a reasonably efficient tool formanagement.

* The Central Bank, with the designated wholesale bank, should take the lead in designingthe detailed mechanics of the preshipment finance system and train and assist the accreditedbanks in implementation procedures.

2. Preshipment Export Finance Guarantee (PEFG). Establishing an effective collateralsubstitute is an essential component of setting up a transaction-based export finance scheme. Therefore,this sh suld be accorded equal priority and be designed and implemented parallel to the preshipment scheme.The basic direction of reforming the PEFO should be to assure access to PEFG coverage to all exporterswi:h confirmed export orders. To achieve this objective, the following elements would be critical, inaddition to strong commitment of the Government in terms of initial support of needed resources:

* Philguarantee should take responsibility for the operation of a reformed PEFG due to theurgency of reviving the PEFG, the expected costs, and the amount of time needed forcreating a new institution--even though extra efforts would be needed for Philguarantee torecover its creditability with banks and exporters due to its past ineffectiveness.

* The PEFG agency should have as its medium-term objective the provision of PEFGcoverage, at the request of the lending bank, for all exporters with confirmed export ordersand without past loan default records. The agency should develop an effective informa-tion network so as to sort out exporters with loan misuse records from the PEFG coverageand help inexperienced exporters obtain technical assistance.

* Speedy and automatic payment should occur in response to exporters' non-performance.This is critical for building confidence about the PEFG and for inducing banks to changefrom "collateral line"-based export loans to 'back-to-back LIC"-based export loans.

* The lending bank should be informed of the availability of PEFG coverage for a client earlyin the export processing cycle.

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* The preshipment export finance disbursement mechanisms should be modernized to reducethe risks of export loan misuse and create quasi-collateral with materials imported ordomestically purchased with the loan.

* Private exporters associations should participate in the financing and operation of theguarantee agency.

3. PostshMpment Finance and Export Credit Insurance & Guarantees. Improving postshi-pment export financing and export credit and insurance guarantees is a significantly lower priority than thepreshipment measures outlined above. It is suggested, therefore, that the optimum scale and timing forestablishing such an export credit insurance and guarantee system should be studied only after the reformof preshipment finance and guarantees.

4. Implementation. To design and oversee the implementation of the program proposedabove, the study suggests establishing an interagency task force. This should include representatives fromDTI, CB, DOF, the designated wholesale bank, such as DBP, Philguarantee and commercial banks.

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HI. CENTRAL BANK EXPORT LOAN PROGRAM

2.01 At present, the most important export financing scheme in the Philippines is the CentralBank's (CB) rediscount window, which rediscounts short-term working capital export loans. Commercialbanks are the retail banks for these loans.

A. Interest Rates

2.02 CB rediscounts 80% of preshipment, and 100% of postshipment working capital exportloans at an interest rate adjusted periodically--the rate in June 1989 was 12% per annum. The CBrediscount rate to the commercial banks was roughly in line with the banks' rates for deposits under oneyear.YI The commercial banks charge a market interest rate to exporters.Y'

2.03 In mid-1989 the interest rate on CB rediscounted export loans was about 18% to 20%,resulting in a 6% to 8% spread for the handling banks. These rates were in line with other market-determined rates for working capital loans to non-exporters and therefore do not incorporate a subsidy.

B. Procedures

2.04 Preshipment Loans. Under this CB rediscount scheme, so-called "export packing loans"(EPL)Wy are short-term loans to cover preshipment working capital needs based on actual export orders.T*he loan base of an EPL is the face value of the L/C, purchase order (PO), or sales contract (SC).Commercial banks grant the EPL ranging from 80% to 100% of the loan base on a discretionary basis.An EPL's maturity period may not exceed 90 days but can be rolled-o sr for another 90 days at theprevailing discount rate. Subsequent roll-over, however, is allowed only at a much higher discount rate(24% per annum).2' The maturities of CB loans and advances cannot be extended beyond the expirationdate/validity period of the assigned L/Cs, POs, or SCs. Promissory notes secured by export L/Cs, FOs, orSCs are rediscounted with the CB.

2.05 An EPL is always accompanied by assignment of the export proceeds of L/Cs, POs, or SCsso that upon negotiations, the proceeds of the export draft are applied to the payment of the exporter'soutstanding loan. At present, loan disbursements are initiated as soon as export orders are presented tothe handling banks, whereas actual payment for imported or domestic inputs does not occur until the importLJCs or domestic purchase bills are negotiated. Among other documents normally required for the EPL,the CB requires a bank-certified copy of the exporter's 12-month inward dollar remittances of exportproceeds. For a new exporter applying for rediscounting, certification from his bank that he is a new

§/ CB circular No. 1203: The Monetary Board Resolution No. 518 dated June 23, 1989.

y/ In 1984, a floating interest rate system was adopted by charging the Manila Reference Rate(weighted average of the interest rate paid during the immediately preceding week by the tencommercial banks with the highest levels of outstanding deposit substitutes on promissory notesissued by such banks) less 2% for non-traditional exporters and MRR for traditional exporters.Subsequently commercial banks have been allowed to determine a lending rate without anygovernment's involvement.

J/ This paper uses the term "export packing loan" (EPL) rather than "export packing credit" in orderto distinguish clearly "bank loan" from "bpnk credit". A bank lends money when it provides a 'loan";a bank lends "credit" only when it creates a letter of credit (L/C) or bankers' acceptance (BA)without requiring collateral. See Rhee (1989a).

y/ The Central Bank circular No. 806 (June 26, 1981).

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exporter is necessary. Indirect exporters are not eligible for the EPL (see para. 2.11), even though they areseveral times more numerous than the 6,000 direct exporters.

2.06 Postshipment Loans. Negotiated sight export bills (inc!uding export bills under D/A or D/Parrangements) may be rediscounted with the Central Bank with maturities ranging from 10 days (for USWest Coast, Japan, and Southeast Asia) to 40 days (Africa and Middle East). The documents required bythe CB are duplicate copies of drafts (endorsed in favor of the CB), commercial invoices, and bills of lading.In turn, rediscounting of usance export bills is allowed up to the usance period of the bill, provided theexporter is not financially related to the buyer (i.e., not a parent or sister company). If the usance periodexceeds 60 days from the shipment date, however, the exporter needs permission from the CB's ExportDepartment to extend the payment period.

Table 1: CB PRESHIPMENT AND POSTSHIPMENT EXPORT LOANS OUTSTANDING

Preahipment Export Loan Postshipment Export Loan Total Export Loan

(a) (b) (c)Outstanding (Relative Outstanding (Relative Outstanding

Value Shares) Value (Shares) ValueYear (million pesos) (%) (million pesos) (%) (million pesos)

1985 2,118.7 (97.8) 48.0 (2.2) 2,166.7

1986 1,173.6 (99.8) 1.8 (0.2) 1,175.4

1987 1,726.2 (99A) 9.8 (0.6) 1,736.0

1988 1,989.4 (99.7) 5.6 (0.3) 1,995.0

Average (99.2) (0.8)

Source: Central Bank of the Philippines.

C. Composition of EPIs

2.07 The average shares of the preshipment and postshipment export loans in total CB exportloans, in terms of outstanding values, were about 99% and 1%, respectively, in recent years (Table 1). Thecorresponding average shares in terms of total CB export loans granted were somewhat different: 86% and14% (Table 2). However, these shares underrepresent the relative importance of the preshipment exportloan and overrepresent the relative importance of the postshipment export loan. This is because the averageloan period for the former was 3.6 months while for the latter it was only 0.4 months.

D. Major Issues

Worsening Trends in OveraOl Access.

2.08 The 1980s saw a major decline in the scope of the CB export loan rediscount program(Table 3). Since the peak year 1980, the dollar equivalent of CB export loans outstanding, as a percentageof total commercial bank loans outstanding, declined from 8% to just 2% in 1984-88. The most importantindicator of the level of aggregate access to the CB export loan is the ratio of loans outstanding to exportvalue. This has declined from 14% in 1982 to just 1% in 1986-88, as shown in the last column of Table 3.The trend in aggregate access in terms of the ratio of granted loans (i.e. flow) to export value ratio is evenmore striking. This ratio declined from 55% in 1980 to 4%-6% in 1987-88 (Table 4).

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Table 2: CB PRESHIPMENT AND POSTSHIPMENT EXPORT LOANS GRANTED

Preshipment Export Loan Postshipment Export Loan Total Export Loan

(a) (b) (c)Relative Relative

Loans Granted Shares: Loans Granted Shares: Loans GrantedYear (million pesos) (%) (million pesos) (%) (million pesos)

1985 5,857.2 (92.1) 504.5 (7.9) 6,361.6

1986 7,328.9 (85.5) 1,244.3 (14.5) 8,573.2

1987 3,986.0 (80.1) 992.7 (19-9) 4,978.7

1988 7,964.4 (87.4) 1,44.7 (12.6) 9,109.1

Average (86.3) (13.7)


2.09 The result of this decline is that only a limited number of exporters have regular accessto the scheme--fewer than 500 exporters (out of about 6,000 direct exporters--Table 5).!AI The most recentCB export loan aggregate access indicator (outstanding preshipment export loans as a percentage of totalexports) for the Philippines was the worst among six developing countries, as shown in Table 6. This veryunfavorable cross-country comparison resulted from the significant decline in coverage during the 1980s, asnoted above.W

2.10 Access for Small and Infant Exporters. T. 8 fact that only 5% of total export value wascovered by the CB preshipment export loans in 1988, and that p. tbably fewer than 500 direct exporters hadaccess to it, suggests that most small and infant exporters had great difficulties obtaining such loans due totheir lack of physical collateral and short-term track records. The annual shipment values of more thanhalf of the total exporters were less than $100,000 in 1988 (Table 5), suggesting that the majority ofPhilippines exporters are s..aall firms.

2.11 Exclusion of Indirect Exporters. Indirect exporters are output-supplying firms that providefinished goods to trading companies, and input-supplying firms that provide intermediate goods to final-stage export manufacturers. In light of the need to promote backward linkages more aggressively in suchleading export sectors as garments/textiles and electronics, efficient mechanisms for providing equal exportincentives to indirect exporters are needed. One such a mechanism is the domestic L/C. However, underthe current EPL disbursement mechanisms, it is impossible to institute back-to-back domestic input purchasebill clearance (such as domestic L/C negotiation) mechanisms parallel to the back-to-back import L/Cnegotiation mechanisms being implemented by most commercial banks. In the absence of such parallelmechanisms for domestic input and output trade tied to exports, it would be difficult to include indirectexporters in the EPL system, as discussed further in Chapter VII.

1O/ Number of annual transactions for the total CB export loans were 3,666 in 1988. Assuming thaton average one exporter's turn-over for the preshipment export loan was 4 (Table 4) and oneexporter used four postshipment export finance transactions, one can conjecture that 458 exportersreceived the export loans.

ID/ This aggregate picture of the CB export loan access problem suggests the need for a sample surveyof export manufacturers and commercial bankers for the purpose of collecting first-hand informa-tion. This survey was undertaken in July 1989, and the results are summarized in Chapter 5.

Table 3: CB EXPORT LOAN (OUTISTANDING)-EXPORT RATIO TRENDS, 1971-88

(a) (b) (c) (d)Central Bank qxt Total Central Bank Total loan

Avge loan outstanding loan ousanding outstanding of Commodity _W Sf !FExchange to commercial ban to commercial banL commercial banks Export (a) (a) (a)

RateYear (PIS) (P mln) (US$ min) (P m) (USS mln) (P min) (USS mln) (USS mln) (b) (c) (d)

1971 6.432 13 2.0 680 105.7 - - 1,186 0.02 - 0.001972 6.675 90 13.5 733 109.8 - - 1,230 0.12 - 0.011973 6.756 229 33.9 561 83.0 - - 1,597 0.41 - 0.021974 6.788 1,126 165.9 2,079 306.3 - - 3,143 0.54 - 0.051975 7.248 1,438 198.4 2,305 318.0 - - 3,459 0.62 - 0.061976 7.440 1,047 140.7 2,002 269.1 - - 3,634 0.52 - 0.041977 7.403 1,123 151.7 2,243 303.0 40,173 5,426.6 3,915 0.50 0.03 0.041978 7366 1,179 160.1 3,013 409.0 54,078 7,341.6 4,732 0.39 0.02 0.031979 7.378 3,443 466.7 5,456 739.5 68,264 9,252.4 6,142 0.63 0.05 0.081980 7.511 6,318 841.2 9,079 1,208.8 77,198 10,278.0 7,727 0.70 0.08 0.111981 7.900 5,846 740.0 11,383 1,440.9 86,505 10,950.0 7,946 0.51 0.07 0.091982 8.540 6,122 716.9 12,963 517.9 98,240 11,503.5 5,021 0.47 0.06 0.141983 11.113 3,844 345.9 8.811 792.9 111,388 10,023.2 5,005 0.44 0.03 0.071984 16.699 2,080 124.6 4,533 271.5 116,382 6,969.4 5,391 0.46 0.02 0.021985 18.607 2,168 116.5 5,425 291.6 87,573 4,706.5 4,629 0.40 0.02 0.031986 20386 1,175 57.6 4,193 205.7 83,087 4,075.7 4,842 0.28 0.01 0.011987 20568 1,736 84.4 3,943 191.7 109,814 5,339.1 5,720 0.44 0.02 0.011988 21.095 1,995 94.6 3,678 174.4 128,786 6,105.0 7,074 0.54 0.02 0.01

w As of end-September.k Ratio CB export loans to total CB loans (a)l(b)Si Ratio CB export loans to total commercial bank loans (a)y(c)y Ratio CB export loans to commodity cxports (a)I(d)


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Table 4: AVERAGE TURNOVER, LOAN PERIODS, ANDLOAN EXPORT VALUE RATIO OF CB EXPORT LOANS

1985 1986 1987 1988 Average

Preshinment Export Loan

(a) Average number ofturnoves 2.8 6.2 2.3 4.0 3.8

(b) Average loanperiod (months) 4.3 1.9 5.2 3.0 3.6

(c) Loans granted- Export value

ratio (%) 6.8 7.4 3.4 5.3

Postshipment Export Loan

(d) Average number ofturnovers 10.5 691.3 101.3 204.4 251.9

(e) Average loanperiods (months) 1.1 0.02 0.1 0.06 0.38

Total Exort Loan

(f) Loans granted- Export value

ratio (%) 7.4 8.7 4.2 6.1

Note: (a) = (a) of Table 2 + (a) of Table 1(b) = 12 +(a)(c) = (a) of Table 2 + (d) of Table 3(d) - (b) of Table 2 + (b) of Table I(e) - 12 + (d)(f) - (c) of Table 2 + (d) of Table 3

Table 5: NUMBER OF DIRECr EXPORTERS AND THEIR EXPORT SHIPMENTS IN 1988

Value of No. of FOB Value ofAnnual Shipment Exporters (%) Exports (% of Total)

Below $5,000 1,158 (19.4) S2,070,701 (0.03)$5,000 - $10,000 521 (8.74) $3,837,417 (0.05)$10,001 - $49,999 1,337 (22.43) $34,318,169 (0.49)$59,000 - $99,999 610 (10.23) $43,556,368 (0.62)$100,000 - $249,999 705 (11.83) $115,068,482 (1.63)$250,000 - $499,999 449 (7.53) $159,893,241 (2.26)$500,000 - $999,999 414 (6.95) $298,063,211 (4.21)$1,000,000 - $2,000,000 284 (4.76) $410,259,481 (5.80)$2,000,000 - $5,000,000 250 (4.19) $779,408,000 (11.02)$5,000,000 - $10,000,000 103 (1.73) $722,651,637 (10.22)$10,000,000 - $50,000,000 106 (1.78) $2,201,685,659 (31.12)$50,000,000 - $100,000,000 18 (0.30) $1,23Z996,233 (17.43)

More than $100,000,000 6 (0.10) $1,070,380,968 (15.13)

Total 5,961 J (100.0) $7,074,189,567 (100.0)

/ Total number of shipments was 258,558.

Source National Statistics Office.

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Table 6: CROSS-COUNTRY COMPARISON OF ACCESS TO EXPORT LOANS

Outstanding PreshipmentExport Loan

Export Value as PercentageYear Country ($ million) of Total Exports

1981 Korea 21,254 17.81981 Brazil 16,505 15.21981 India 7,457 13.91981 Ihailand 6,652 7.51981 Mexico 4,846 2.11988 Philippines 7,074 1.3

Source: Tables 1 and 3 of Yung Whee Rhee, Trade Finance in Developing Countries, Policy and Research Series No. 5, the WorldBank, 1989, p. 37.

Lack of a Foreign Currency Loan Scheme

2.12 Currently, most exporters meet their short-term import financing needs by using localcurrency loans to purchase foreign currencies from the foreign exchange holdings of the Philippines. Onthe other hand, exporters must convert the full amount of their foreign exchange earnings into localcurrency as soon as they receive export revenues. Exporters' costs stemming from the considerable gapbetween the buying and selling rates for foreign exchange are quite substantial. Furthermore, the absenceof a foreign currency loan (FCL) scheme for exporters means that exporters' access to critical import financecould be interrupted in the event of another foreign exchange crisis. This is discussed further in Chapter V.

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m. OTHER EXPORT FINANCE SCHEMES

3.01 In addition to the CB's export loan rediscount scheme, a number of other schemes operatefor small and medium-size exporters. These are summarized in Annex I. The most important schemes formanufactured exporters are discussed below.

A. PITC Schemes

Ten Million Peso Facility

3.02 To provide access to preshipment working capital without requiring physical collateral, thePhilippine International Trade Corporation (PITC) introduced the so-called Ten Million Peso Facility in1987.

3.03 Small and medium, direct and indirect, export manufacturers of priority products identifiedby the International Trade Group (ITG) of the Department of Trade and Industry (DTI) are eligible forthe Facility. Eligibility is confirmed by export L/Cs endorsed by the ITG, Regional Domestic Group (RDG),and industry associations. Exporters who are regular clients of the PITC also are eligible for the Facility.

3.04 The maximum loan amount is 70% of the L/C value up to P200,000 and not exceeding thenet worth of the firm. The only security required is a promissory note and L/C proceeds assigned to thePITC. The borrowing cost is the prime rate charged by the Philippine National Bank (PNB) or the LandBank (whichever is lower) during the immediately preceding week, plus a 2% service fee to the PITC.

3.05 As of the end of August 1989, the total loan amount granted under the Facility was P13.1million to 47 borrowers. Even though the Facility is very popular among small and infant exporters, thelimited amount of available funds has made it impossible to expand the coverage beyond these currentborrowers.

Import IUC Deposit Support for CCBTW Users

3.06 Unlike economies with well developed bank credit systems or well des. ned trade financingsystems, Philippine banks require credit line coverages or prior deposits for opening back-to-back importL/Cs (based on confirmed export L/Cs). Exporters who do not have credit lines with commercial banks havedifficulty opening back-to-back import L/Cs due to their lack of funds for prior deposits. The PITC offerssuch exporters full or partial support of these deposit requirements (i.e., 100% or 70% of the full L/C valuedeposit requirements, from import L/C opening to negotiation). This is for PITC's Common CustomsBonded Trading Warehouse (CCBTW) customers.I21

3.07 Exporters using the scheme must pay the import bill to the PITC when they removeimported materials from the CCBTW to their factories. Thus the scheme can hardly be considered importfinancing in the conventional sense, even though staggered withdrawals and payments are allowed.

B. Export Industry Modernization Program

3.08 The Overseas Economic Cooperation Fund (OECF) supports the Export IndustryModernization Program (EIMP), which is administered by the Technology Livelihood Resource Center(TLRC). This program finances both capital equipment and working capital needs for export-orientedsmall and medium enterprises. These firms must not have assets of more than PIO million and must be

L2/ The PITC and the Philippine Exporters' Foundation operate the two separate CCBTWs.Garment-related imports are not allowed in these CCBTWs.

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implementing modernization plans. As of June 1988, the total amount granted under the EIMP was P490million.

3.09 This program's weaknesses are its avoidance of conventional commercial bank practicesand its dependence on subsidies. These factors contribute to the EIMP's poor repayment performance andseverely limit the feasibility of introducing efficient disbursement based on procedures discussed below.

C. LIVECOR's [C Financing Program

3.10 The Livelihood Corporation (LIVECOR) has an L/C and domestic purchase order (PO)financing program for both exporters and non-exporters. As of June 1988, its loan total was P82 million(119 clients).

D. irhe Philippine National Bank's International Trade Financing Program

3.11 In response to the growing need for more accessible trade financing for foreign-exchange-oriented industries, the Government, through its own bank, the PNB, established the International TradeFinancing Program (or FXT1 Fund) in 1988. The facility is geared toward providing both preshipment andpostshipment financing to small and medium-scale exporters by way of clean, or partially secured creditaccommodations.

3.12 Based on feedback to PNB, customers have availed themselves of the facility so far only atthe branches catering to relatively smaller exporters. Bank officials report that modifications are necessarysince exporters find some of the conditions, particularly the financial ratio and collateral requirements, rigid.

E IGLF Scheme

3.13 The Industrial Guarantee Loan Fund (IGLF) instituted an export finance scheme in 1987.It provides medium and long-term working capital support for both direct and indirect exporters. As ofmid-1989, the total amount of export loans under the scheme was about P61 million.

F. k rade Facility

3.14 All trade credits from international banks (a total of 103 banks) to the Philippine publicand private sectors were converted to the Central Bank Trade Facility on August 5, 1985. The outstandingexternal short-term debt stemming from such trade credits at that time was US$3 billion. Even though thestated objective of the Trade Facility is to support short-term trade financing (not exceeding 360 days), theFacilitv initially did no more than reschedule short-term external debt associated with past trade credits.

3.15 However, the Facility has been most extensively used for confirming import V/Cs (Table 7).Even though part of import 1.Cs must be for importing materials for export production, mere confirmationof import [/Cs by participating foreign banks can hardly be called export financing. Furthermore, a majorprivate sector user of the Facility has been the oil companies; in fact, most firms benefiting from cleanadvances appear to be large producers. It is unclear, even in the case of these large producers, how muchthe Facility has contributed to meeting their export financing needs, however. Sample commercial bankinterviews revealed that most imports supported by the facility have been for multinational companiesproducing goods for the domestic market.

3.16 Although it does not appear that the Facility has played a critical role in export financing,import LJC conflrma*.on through the Trade Facility might have been important to recover the confidenceof foreign suppliers. In turn, the import V.C deposit support scheme has been critical for some small infantexporters, due to the conservative practices of some Philippine commercial banks.

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Table 7: REVOLVING SHORT-TERM TRADE FACILIfYBALANCES AS OF JULY 31, 1989

(USS million) Balances

Commercial Banks 1,080572

1. Confirmed U/Ca 1,014.7552 Export Finandng 0.0003. Clean Advances 42.6624. Overdrafts 0.65S5. Bankers Acceptances 10.5006. Trade with Overseas Branches 12.000

Central Bank

1. Deposits 7S4.8232 Capital Asset 7.779

Public Sector Oblixors 553.911

1. Oil 260.1702. Clean Advances 227.8213. Bankers Acceptances 47.9204. Capital Asset Purchase Credit

Private Sector Oblisors S86.741

1. Oil 450.6762. Clean Advances 4S.0653. Bankers Acceptances 1.0004. Export Financing 0.000

Total Particinatins Trade Credits 7Z958.047

Commitments 2,909.005

Excess (Shortfall) 49.042


3.17 Since these support schemes for import LJCs cannot be considered conventional exportfinancing, more efficient ways must be found to address the stringent commercial bank practices.

G. Summaq

3.18 The various export loan support schemes discussed above have undoubtedly been importantfor selected exporters who otherwise would have had difficulty meeting their export financing needs.However, since the amounts granted under these schemes do not appear to cover even half a percent of thetotal export value of the Philippine economy, nor the value of the exports of a few hundred exporters, theseschemes do not alter the aggregate picture about access difficulties in export financing, discussed inChapter 11. Nor does it appear that having various public agencies establish many schemes is the mostefficient way to deal with the problem for small and infant exporters.

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IV. PRESHIPMENT EXPORT FINANCE GUARANTEES

4.01 In most developing countries, heavy collateral requirements by commercial banks are themajor cause of the failure to assure exporters access to financing. The instrument that has evolved in anumber of successful exporting countries to address this problem is the preshipment export finance guaran-tee (PEFG) scheme. The objective of such a scheme is to provide a collateral substitute. PEFG protectscommercial banks against the risk of exporters defaulting. This would stem from their non-performanceof export orders.

4.02 PEFG should be carefully distinguished from an export credit insurance/guarantee (ECI/G)scheme, which protects exporters/commercial banks against non-payment risks by foreign buyers.U' ThePhilippine Goverrment has operated a few vcrsions of PEFG schemes. These are discussed below.

A. Export Credit Guarantee Program for Small and Medium Industries

4.03 Providing PEFG coverage is the major objective of the Export Credit Guarantee Programfor Small and Medium Industries (ECGP-SMI) administered by Philguarantee (Philippine Export andForeign Loan Guarantee Corporation). ECGP-SMI also provides postshipment guarantees.

4.04 Philguarantee was established in 1977 with the objective of guaranteeing local constructioncontractors' projects abroad. It absorbed the functions of the Philippine Foreign Loan GuaranteeCorporation, which had been created in 1974.

Coverage and Eligibility

4.05 The maximum coverage of the ECGP-SMI is P5 million (guarantees of more than P5 mil-lion per beneficiary are handled by the General Guarantee Facility of Philguarantee), with maximumguarantee coverage 70% of the approved loan. To qualify for the ECGP-SMI facility, borrowers musthave: (a) a three-year track record of exporting priority non-traditional export products; (b) an averageprofit margin of 10%; (c) an average return on equity of 15%; (d) an average current ratio of 1.5 to 1; and(e) an average debt to equity ratio (net of valuation increment) of no more than 3. Small (assets of at leastP500,000 but less than P5 million) and medium-scale exporters (assets of at least P5 million but less thanP20 million) are eligible for the facility.

4.06 Philguarantee bases its guarantee coverage on its own evaluations of favorablerecommendations of lending banks. Lending banks conduct detailed credit evaluations before recommendingthe ECOP-SMI coverage.

Performance

4.07 At the end of 1988, the outstanding value of ECGP-SMI guarantees was only P38 million($1.8 million) down from a peak of P80 million ($9.4 million) in 1982 (Table 8). The number of accountsoutstanding also declined from 83 in 1982 to 15 in 1988. These trends indicate that Philguarantee has beenunable to become a dynamic development institution dealing with one of the most complex developmentissues.

4.08 As for the composition of guarantees, the emphasis on PEFG (Annex II, Table 1), smalland medium-size firms (Annex II, Table 2), and labor and local resource-intensive light manufactured exportsectors (Annex II, Table 3) appears to be consistent with the needs of Philippine export enterprises.However, the insignificant role of the guarantee system in Philippine export development is evident fromthe fact that only 15 exporters and less than 2% of the CB export loans (which were limited to only 6%of the total export value) were covered by the guarantee system in 1988.

I3 See Rhee (1989a) for the basic difference between PEFO and ECUG.

Table 8: PERFORMANCE HIGHLIGHTS OF PHILGUARANTEE ECGP-SMI FACILIT1Y(in miUion pesos)

1980 1981 1982 1983 1984 1985 1986 1987 1988

Guarantees outstanding,beginning - 29.7 64.6 80.4 70.2 53.0 32.9 30.9 345

Add. Otees. Issuedfor the year 29.7 55.6 64.8 55.8 37.7 18.9 22.1 255 25.7

Guarantees outstandingfor the year 29.7 85.3 1294 136.2 107.9 71.9 55.0 56.4 602

Les: Reavailmentsfor the year - 93 22.1 32.5 30.0 13.6 202 16.5 153

Gtees: Outstanding netof reavailments 29.7 76.0 1073 103.7 77.9 583 34.8 39.9 449

LSs Cancelled guarantees - 10.1 16.5 28A 21.1 15.4 3.6 5.4 65

Guarantees outstandingbefore defaults 29.7 65.9 90.8 753 56.8 42.9 312 34.5 38A

Less: Guarantees in default - 13 10.4 5.1 3.8 10.0 0.3 - -

Guarantees outstanding, ending 29.7 64.6 80.4 702 53.0 32.9 30.9 34.5 38.4

Number of accounts outstanding 24 82 83 76 42 35 17 18 15

Source Philguarantee

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Plroblems with ECGP-SMI

4.09 Key factors limiting the effectiveness of the ECGP-SMI facility in improving access topreshipment export financing are: (a) lack of sustained commitment by the Government; (b) Philguarantee'slack of credit-standing stemming from its earlier losses on overseas construction project guarantees and itslater emphasis on 'no risk-taking;" and (c) flaws in the basic technical and operational approach adoptedby the ECGP-SMI facility. Although these factors are highly interdependent, the root cause of Phil-guarantee's ineffectiveness can be traced to flaws in the basic approach adapted by the P3 Million Facility(up to 1986) and the P5 Million ECGP-SMI Facility (from 1987).

4.10 The ECGP-SMI eligibility criteria and the guarantee decision-making procedures (based ondiscretionary credit evaluations of export loan banks and Philguarantee) negate the true task of the PEFG:to cover "non-performance risk of all exporters' who have confirmed export L/Cs, excluding only those firmsthat have "export loan misuse risk."IN Instead, they exclude those exporters who were supposed to be thekrue target group (i.e., who would not have access to export loans without the PEFG). As such, theprocedures have established "no risk-taking" as the guiding principle.

B. Guarantee Program Supported by USAID

4.11 In September 1988, the U.S. government enacted legislation providing new loan guaranteeauthority to promote private sector development in developing countries. USAID administer, this program.Under the program four major Philippine banks provide small and medium-size enterrises twith export oragriculture loan guarantees up to $2.4 million for each bank (Table 4 of Annex II).iY

4.12 The U.S. bank handling the program opens a stand-by L/C for the participating Philippinebanks. The participating banks send quarterly loan guarantee reperts to the U.S. bank. Ninety days aftera loan default the participating bank calls in the stand-by L/C for the guarantee payment, equivalent to 50%of the loan default.W The guarantee fee is 1.3% (per annum) of the loan amount covered. A major partof the fees collected is supposed to cover an AID fee (1/2% per arnium) and a LJC-opening bank fee(1/4% per annum). Due to the administrative simplicity and the automatic guarantee payments in the eventof defaults, the program appears to be very popular among the participating banks.

Lessons and Issues

4.13 The most important lesson from the USAID program is that the automatic guaranteecoverage and guarantee payment have made the scheme operative and popular among exporters and bankers,as has the administrative simplicity. This reinforces lessons learned elsewhere that an automatic paymentmechanism and administrative simplicity should be two key guiding principles for reforming the PEFGsystem.

4.14 The major drawback of the AID program is its ad hoc nature. Since it is not a programdesigned to build a PEFG institution, the sustainability of the scheme is uncertain. Also, it is difficult todetermine how much additional exporting the program has generated by making loans that might not Favebeen possible otherwise. Lacking an effective mechanism restraining other collateral requirements, it is

14/ See Rhee (1989a).

DJ Information on this program may be incomplete, because it is based on interviews of a fewPhilippines bankers.

6Jf AID is currently required to maintain a reserve account equal to "not less than 25 percent" of theamount of the Agency's outstanding contingent liabilities under the Guarantee Program. In othervords, for every $1.00 held in reserve AID may issue $4.00 of guarantees.

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unclear whether the banks simply use the program as additional protection on top of their normal collateralrequirements.

C. Magna Carta for Small Enterprises

4.15 The objective of the proposed legislation 'Magna Carta for Small Enterprises" is anintegrated approach to providing Government support to small enterprises in terms of financing and financeguarantees. However, it is not clear how measures under this legislation would relate to other programsand institutions. Also, detailed mechanisms and institutions suitable for the Philippines have yet to bedesigned, not to mention enacted and implemented. Further, the scope of the "Magna Carta" is muchbroader than the export sector, and at this stage it is unclear how the PEFG function would fit into acomprehensive design for a smal enterprise finance guarantee system. Sorting out these institutionalarrangements is clearly a priority matter.

D. Direction of PEFG Reforms

4.16 In reforming the PEFG system in the Phi'ippines, the following lessons would provide abasis for setting a new direction:

(i) The failure of the Philguarantee PEFG has a lot to do with its "no-risk" approach, whichis tiasically inconsistent with the ultimate objective of a PEFG--that non-performance risksfor all exporters with confirmed export orders (direct and indirect) should be covered,eliminating only export loan misuse risks.

(ii) The apparent popularity of the USAID finance guarantee scheme stems from its automaticguarantee coverage and payment and its administrative simplicity.

(iii) The ad hoc and fragmented approach of the past has not been an ineffective system ofexport finance.

(iv) Current export finance disbursement and liquidation mechanisms fail to provide built-insafeguards for potential misuse of export loans.

(v) A reformed PEFO facility will need to establish its credibility with the financial sector, bothin terms of a strong financial base and a willingness to pay claims promptly.

4.17 The basic direction of reforming the PEFG should be to ensure access to PEFG coverageof exporters' risk for all exporters with confirmed export orders. To achieve this objective, the followingelements would be critical, in addition to the strong commitment of the Government:

(i) The guarantee scheme should establish an operating sequence so that the lending bank isinformed of the availability of PEGG uoverage for a client early in the credit appraisal cycle.This would prevent doubts about an exporer's performance from leading to prematurerejection.

(ii) The preshipment export finance disbursement mechanisms should be modernized to reducethe risks of export loan misuse as well as to create quasi-collateral with materials importedor domestically purchased with loan money.

(iii) The PEFG agency should have as its medium-term objective the provision of coverage, atthe request of the lending bank, for all exporters with confirmed export orders and w;houtpast loan default records. To underpin this objective, the agency should develop an effectiveinformation network to sort out exporters with export loan misuse intentions.

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(iv) Speedy and automatic payments of defaults stemming from exporters' non-perfortnance risksare critical for to building confidence about the PEFG so as to induce banks to change from"collateral line"-based export loans to "back-to-back L/C"-based export loans.

(v) The export community and exporter associations should be encouraged to participate in thefinancing and operation of the agency with the objective of bringing in private sectorinitiatives and strengthening the information function of the agency.

/7J See Economic Advisory Group (1980) and Levitsky and Prasad (1987) for the information andtechnical assistance functions of the 52 regional small industries finance guarantee associations ofJapan.

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V. INTERVIEW RESULTS ON EXPORT LOAN ACCESS PROBLEMS

5.01 The aggregate data discussed in Chapters II and III presented a disappointing picture ofthe coverage of export finance in the Philippines. To collect first-hand information regarding small andinfant exporters' difficulties with export financing, it was necessary to conduct a survey of export manufac-turers and commercial bankers, using structured questionnaires. The focus of the interviews was to identifyfactors that prevent easy access to trade financing, especially for small and infant exporters. The objectivewas to suggest policy and institutional reforms to improve access for exporters with confirmed export L/Cs(or other export orders).

5.02 This chapter summarizes the results of interviews with 95 exporters (82 direct and 13indirect) and 11 commercial bankers. An attempt was made to represent the true population of Philippineexport enterprises by selecting a balanced sample of small, medium, and large-scale exporters (includingindirect exporters) from the major export industries. Tables 1 to 5 in AA nex III show the characteristicsof the sample export firms in terms of size, annual export sales, industry classification, legal classification,market destination, and location.

A. Access to Various Export Finance Instruments

Access to EPL

5.03 Based on the sample survey, only about 10% of small-scale firmns and 35% of medium-sized firms had access to Central Bank export loans (EPL), while 65% of large-scale firms used the EPL(Annex III, Table 6a). The major reason for access difficulties to the EPL is the physical collateral require-ments of banks (see case stories below). EPL supply side constraints also have contributed to the accessproblem, according to the exporters and bankers interviewed, specifically:

(i) the CB rediscount ceiling, which limits a bank's daily rediscount volume based on its networth and outstanding value of rediscounts;

(ii) no CB regional rediscounting and, therefore, no speedy rediscounting; with banks forwardingrequests to the head office instead; and

(iii) the rigidity of the 90 day limit (and associated penalty rate), documentation requirements,and longer processing time.

Access to Other Export Loan Programs

5.04 About 26% of the sampled small- and about 13% of the medium-size firms (mostly gifts,toys and housewares industries) had access to the PITC and TLRC schemes, while only 6% of the largefirms used these facilities (Table 6a in Annex 111). This confirms that the purpose of these schemes wasto assist small exporters who had difficulties getting an EPL. However, the size of these schemes is toosmall compared to the actual needs of such exporters.

5.05 PITC. AlI except one firm of those availing themselves of either PITC's PlO million facilityor its bonded warehouse joint financing scheme, have expressed their satisfaction with the program's abilityto provide preshipment financing. Although exporters find the P10 million facility's P200,000 loan limitquite small for most of their preshipment needs, the simple requirements, ease in documentation, and facilityin the release of funds are enough to compensate for the small loan amounts. Popularity of the program

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among small exporters is evident in their frequency of borrowing. Most of the facility's recipients have re-borrowed more than three times on average.

5.06 TLRC. Exporters who have used TLRC's financing facilities and several others who didnot pursue their applications for the scheme have the following comments:

* The programs' requirements are too rigid since they also require collateral. Some exporterswent as far as saying that the programs are only good on paper and that they have the rightobjectives but poor implementation. Others feel that though the programs are geared forthe small firm, the requirements can only be met by large firms.

* Application processing time is too long. By the time the funds arrive, orders have beencancelled or the order season has passed.

* Cost of using the facility is too high. Besides high fees, there are questionable and rigidrequirements, one of which is an expensive project study.

* TLRC's Urban Livelihood Financing Program imposes the condition of staggered withdrawalof the loan, This condition hinders the exporters from availing themselves of seasonal rawmaterials.

5.07 Despite these comments, a few exporters were satisfied with the program. They claim thatdifficulties arise primarily at the initial stage of accreditation for the program.

Access to Other Trade Finance from Commercial Banks

5.08 As indicated in Chapters I and II, trade finance is working capital finance based on tradetransactions (i.e., export, import, or domestic trade). Philippine commercial banks provide their customerswith non-EPL trade finance from their own resources (i.e., without rediscounting at the Central Bank). Ofcourse, just as in the case of the EPL, the collateral requirements of banks are the major factor preventingmuch wider access to non-EPL trade finance. However, the fact that more than 30% of the sampled small-size exporters had access to non-EPL trade finance, while only about 10% of them had access to the EPL,raises the following two questions:

5.09 First, why did banks and small exporters choose the non-EPL export finance? The fact thatonly 6% of the large-scale sampled exporters used the non-EPL while 65% used the EPL implies thatexporters and bankers prefer EPL to other trade finance. (As for the medium-siLe exporters, about 39%of them used non-EPL export finance, while about 36% used the EPL).

5.10 Some of the major reasons why banks do not discount export loans granted to exportersat the CB appear to be:

* banks' belief that administration costs associated with discounting small loans with EPL mayoutweigh gains from discounting;

* EPL supply-side constraints imposed by the CB for monetary reasons; and

* some exporters receiving financing before they receive export L/Cs.

5.11 Second, in the Philippine context, opening an import L/C is considered trade finance, andthe category of other trade finance includes import L/Cs and general working capital as w( I as

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preshipment/postshipment working capital advances. Therefore, the numerical value of the responseoverstates the true picture on the net loan value.

Self Finance

5.12 About 70% of the sampled small exporters, 55% of the medium exporters, and 53% of largefirms relied on Af inancing to meet part of their export financing needs. Yet the role of self financingin meeting the export financing needs of the small firms might have been quite different from that of thelarge firms. Those fortunate small firms that could afford self-financing could have met the export ordersin the absence of alternative financing sources. Small exporters without their own funds might have failedto meet their export orders. On the other hand, some large firms might have relied on self financing--even if they had many alternative external sources of export loans--because they had idle funds from retainedearnings.

Private Lenders

5.13 About 43% of the small-size and 36% of the medium-size sampled exporters relied on loansfrom private lenders, while none of the large exporters used such sources. Given the high monthly intereston this type of loan, usually 3% to 5%, why did exporters rely on them? The answer is directly at the heartof the export loan access problem in the Philippines. Unable to get bank loans (EPL or non-EPL) due totheir lack of collateral, the only way for these firms to finance their exports was to resort to this extremelyexpensive source, which requires very little or no collateral.

5.14 Interest rates charged by private lenders depend on loan amount and risks. For example,a prawn exporter interviewed for the survey was charged 10% per month for a loan of PI million, whilea garment export manufacturer is charged "only" 2% to 3% per month for a P3 million loan. One foodprocessing indirect exporter, who supplies food exponters with finished goods, resorts to private lenders anduses accounts receivable as collateral at a discounted rate of 6% to 8% of the total 30-day accountsreceivable.

5.15 Because of the absence of a financing facility for indirect exporters and the inability of theseindirect exporters to demand payment upon delivery--they are usually paid after 30 days by the directexporters--these local suppliers have no choice but to resort to very high-cost private lenders.

Company Credit

5.16 Suppliers' credits, consignment exports and imports, and prepayment involve inter-firm creditbetween foreign buyers and Philippine exporters. It appears that, in general, the large exporters have easieraccess to company credits in meeting their export financing needs than the small exporters. In particular,consignment exports and imports were mainly handled by the large exporters.

a. Overseas Suppliers Credit

5.17 The vast majority (about 83%) of garment exporters used suppliers' credits mostly for fabricimports, which account for about 50% of their total raw material expenses. For the purchase of other rawmaterials and supplies, garment exporters are given, at the most, only 30-days credit. Exporters of gifts, toysand housewares are even worse off. Only 42% of exporters in this product category could buy their rawmaterials on credit terms, and most of the materials are just minor components of the final product, suchas hardware and accessories.

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b. Domestic Suppliers Credit

5.18 Basketwork, shellcraft, woodwork and the like use many indigenous materials. These sectorslargely depend on local sup?liers or subcontractors from remote areas of the country where the rawmaterials are found. These subcontractors usually take care of the sourcing and semi-finishing processeson the raw materials. Because of their dire need for funds for their everyday subsistence, subcontractorsnormally demand cash or advance payments for goods delivered. One exporter went as far as going to hersubcontractor's supplier in the provinces to vouch for the integrity of her subcontractor and personally payfor the materials that her subcontractor needed from the supplier. A similar situation exists with thefashion accessories industry, since it is also highly dependent on subcontractors providing local raw materials.

5.19 Footwear exporters, which are informally broken down into (i) large manufacturers ofrubber and plastic footwear and (ii) medium-scale exporters (concentrated in Marikina, a traditionalfootwear-producing region in Metro Manila) of footwear of leather or synthetic materials, usually haveaccess to suppliers' credit. Highly mechanized footwear exporters with large production capacity can availthemselves of longer credit terms to purchase their local raw materials.

5.20 The furniture industry, which also depends on the local supply of rattan, bamboo and wood,hardly avails itself of long credit terms. With a production period averaging between 45-0 days, and creditterms of 30 days at the most for mere accessories and supplies, suppliers' credits do not contributesubstantially to the industry's preshipment financing needs. Most of the time furniture exporters have topay in cash, and even in advance, to get prime quality lumber or rattan. In fact, furniture exporters andthose who manufacture doors and jambs indicate they are required by the lumber concessionaires to paythe full amount of their order even before the trees are cut down.

5.21 Packaging materials, the cost of which accounts for about 10%-15% of the total sales ofexport industries such as garments, textiles and furniture, and 8% to 10% of sales from the gifts, toys andhousewares group, are normally purchased on 15-30 day credit terms. Very few small and medium exporterscan avail themselves of this type of credit because of the large minimum order requirements that theirsuppliers demand.

5.22 The fact that for the purchase of domestic inputs, exporters generally must provide advancepayments rather than have access to suppliers' credits is closely related to the more severe working capitalaccess problems (including the EPL access) faced by indirect exporters and domestic subcontractors.

C. Consignment

5.23 Only 14 of the sampled firms partially or completely operate on a consignment arrangementwith their foreign buyers. Most of these are from the garments and electronics industries. Garment firmscan operate either through a complete cut-make-and-trim (CMI) arrangement, wherein all raw materialsare provided by a specific buyer, or in an arrangement where they can accept consigned export orders toaugment their export earnings. Two garment exporters interviewed for the survey operate strictly on CMT,using raw materials imported on consignment. One of these exporters has been in the garment exportbusiness for only two years. However, the owner relates that she does not have any short-term plans toexpand her company's operations to purchase raw materials because of the difficulty of getting !oans tofinance needed imports, among other things.

5.24 CMT arrangements spare Philippine exporters the trouble of soliciting funds to purchaseimported raw materials and relieve them of the burden of meeting a bank's documentation and depositrequirements for opening import L/Cs. Nevertheless, the exporters have to pay 5%-7% commission feesto Hong Kong trading companies intermediating such arrangements. Furthermore, such consignmentpractices limit the scope for the Philippines to exploit backward linkages.

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d. Prepayment of Foreign Buyers

5.25 Some exporters who develop good business relationships with their buyers demand partialprepayment or a cash deposit of 30% to 50% of the total value of their orders. This arrangement has beenobserved mostly in the fashion accessories industry, although some exporters from other product groups alsorequire cash deposits, through telegraphic transfers, from a small percentage of their foreign buyers.

B. Relative Importance of Various Export Finance Instruments

5.26 Survey results imply the relative importance of the various export finance instruments tothe small, medium, and large firms, respectively. The marked differences between small-size and large-sizefirms are evident in Figure 1. First, while the EPL facility is the most importance source of exportfinancing for the large firms, the EPL is the least important source for the small exporters. Second, whileself-financing and loans by private lenders are the dominant sources of export financing for the smallexporters, the large firms never have to rely on private lenders. Third, company credits are relatively moreimportant for the large firms than for the small exporters. A similar pattern can be found in the samplefirms' responses regarding the average percentages of financing exports based on the various instruments(Table 7, Annex III).

C. Collateral Requirements

Credit LUne-based Loan

5.27 Interviews reveal that Philippine export loans (EPL or non-EPL trade finance) are basicallycredit line-based loans rather than purely export and associated import and domestic purchase transaction-based trade financing. Confirmed export L/Cs can hardly be the basis of export loans if the amount of theloan is not within the ceiling of a firm's credit line as predetermined by the bank. A senior bank officialcandidly reported that the chances were virtually nil that walk-in exporters with confirmed export orderswould be able to get either EPL or non-EPL export financing.

Factors Determining Credit Line

5.28 According to the bankers interviewed, the two major factors determining a credit line arean export firm's physical collateral and its track record. However, so far as small and medium-size firmsare concerned, the sampled exporters revealed that the value of physical collateral is the only factordetermining the credit line ceiling oi a firm. Therefore, for these firms, the terminology "credit line* ismisleading, because "credit" is defined as "trust" or "confidence" given to the borrower by the bank. In turn,the government's preshipment export finance guarantees have not been not very effective in providingcollateral substitutes.

Collateral Appraisal Practice

5.29 The main type of physical collateral is real estate. A majority of the sampled firmsemphasized that collateral requirements ty commercial banks and their conservative appraisal of collateralvalues are the major cause of EPL and other export loan access problems. Banks use a standard collateralappraisal system of real estate based on guidelines established by the Banker's Association of thePhilippines. Normally the loan amount is only 70% of the property's appraised value, which in turn canrange from 70% to 90% of its market value, depending on the bank's assessment. Therefore, the finalloanable amount or credit ceiling of a line will effectively be between 50% to 60% of the collateral's marketvalue.

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FIGURE 1

RELATIVE IMPORTANCE OF DIFFERENT EXPORTFINANCE INSTRUMENTS: COMPARISON AMONG SMALL,

MEDIUM, AND LARGE FIRMS

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28()

OTHER TRADE FINANCE

SUPPLIER'S CREDIT - * .*_* .

SELF-FINANCING . ..... . ...

CONSIGNMENT

PREPAYMENT AND BANK LOANS d

OTHER PRIVATE LENDERS LARGEE . . ...... ........ .... ::: '::' ' A....... .. ' = 7 MEDIUM

6 =3 ~~~~~~SMALLPITC AND TLRC .

Source: Rows A.(d), B.(d), and C.(d) of Table 6a in Annex III.

D. Lost Export Opportunities

5.30 The best way to evaluate the consequences of the loan access problems associated withcollateral requirements, and the lack of effective collateral substitutes supported by the government, is toexamine several case stories collected through our interviews. It appears that, on average, the followingfirms could have increased their exports more than 50% if the access problems were resolved.

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CASE 1. Medium-size Handicraft Exporter

A medium-sized handicraft exporter has been in business for more than 20 years.Having had consistent export sales over the years (except in 1988 when a flood damaged almostP1.0 million worth of goods ready for shipment), the exporter has built up a good track record withher banks. In spite of this, her credit line of P2.0 miUlion has remained fully secured. Because ofthe increased volume of orders received as of early 1989, her credit line was always used up.Things became worse when she received orders worth $1.0 million and $437,000, respectively. Shethen applied for an increase in her credit line to finance her new orders, but she was unable to putup the required additional collateral to secure a new loan. After approaching four other banks--which all required hard collateral, which she could not put up--she was forced to reject the orders.

CASE 2. Medium-size Garment Exporter

A medium-sized garment firm has been exportin6 for the last seven years. It hasexisting credit lines with two banks totaling P3 million, which was already insufficient for the firm'sorders in 1988. (This prompted the firm to borrow P3 million from private lenders.) Credit lineswere secured with machinery and equipment collateral and investment in the bonds of one of itsbanks. Based on its past three-year performance, the firm is doing remarkably well. However,because it has already exhausted all its bank lines and could not get additional funding because ofthe absence of hard collateral, the exporter had to reject an order worth $174,000 and at least threeorders worth $50,000 to $100,000 each.

These two cases appear to contradict bankers' claims that collateral is normally requiredonly from new clients with no track record. Based on the experience of these veteran firms, itappears that good track records and promising export performance are not sufficient for the banksto waive exporters' collateral.

CASE 3. Small Garment Exporters

If access to more export finance is difficult for exporters who have already establisheda good reputation and track record, the chances for small, infant exporters to avail themselves ofexport loans seem bleak. The case of a small garment exporter in business for less than a yearillustrates the serious access problems for infant exporters. In 1988 she was able to obtain an EPLagainst her L/Cs--upon the endorsement of her father, who was a prime client of the bank. Sheused a P600,000 loan from one bank and a P527,000 loan from another to finance two orders latein the year. Early in 1989, she received an order worth P1.7 million and again approached bothbanks for her financing needs. However, because she needed an amount double what she requiredthe previous year, she was required to put up hard coUlateral to secure the loans.

This exporter asked for Philguarantee's assistance in convincing the bank to reconsiderher case. But the bank itself ruled out Philguarantee because it considered the latter's guaranteecoverage of 70% too smal for the risk. Eventually, even Philguarantee denied the exporter'sapplication. Furthermore, the exporter was required by the bank to put down a P25% marginaldeposit and a 75% time deposit, even for a 60-day usance import IJC. This was even with herexport ./C already assigned to the bank as surety. Her usance L/C clearance with the supplier wassupposed to come much later than the export VIC negotiation. By borrowing from several relatives,the exporter was able to raise the amount needed to open her import 1JC. Furthermore, she wasable to bargain with her bank to lift the marginal deposit requirement and just apply the fulamount to the time deposit.

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Having exhausted her funds in opening the import LIC, the exporter had nothingleft for her remaining working capital needs. She then app.oached PITC for its PIO million facility,but her application was denied, again because of her poor financial status report.

Recently the exporter made a partial shipment of this particular order and againapproached her bank for an advance payment of P200,000 to settle accounts with subcontractorsand suppliers, but to no avail.

The big question now concerns how this exporter can finance her other orders. Onemeans might be through the TLRC, where at present she has a credit line application with theinstitution's Balikatan sa Kabuhayan. It accepted her sewing machines as collateral. Her credit lineapplication is for P2.0 million, but inside sources disclosed that probably only half of this can beextended to her.

CASE 4. Infant Artificial Plant Exporter

The small garment exporter seemed lucky to be able to use her 1/C and her father'sendorsement to pull through her export orders last year, or even to use her machines as collateralfor TLRC's program. Most firms, however, are not as fortunate in obtaining bank loans even ifthey can present export L/Cs to the banks.

One case in point involves a start-up exporter of artificial plants, for which there is asurge in export demand, according to industry updates. The export performance and projected salesof this particular firm are indicative of this high demand.

However, in spite of its good export performance over almost two years, the firm stillhas not had access to bank loans. Officers of the export firm related that they have tried to gainexport loans based on their L/Cs from three commercial banks and one development bank but havebeen rejected because of their failure to put up hard collateral. Furthermore, the firm does notown any machines large or valuable enough to be considered for mortgage. Its main sources offunds are PITC's joint-financing program and the PIO million facility, which the firm has usedhand-in-hand since it started its export operations.

This firm's lost opportunities are not quantifiable at this point because it could not

even entertain inquiries from PITC's foreign buyers who specifically ordered this firm's artificialplants.

CASE 5. Small-size Sportswear Exporter

Another interesting case is that of a small garment exporter specializing in high-qualitysportswear. The firm started as a knitting subcontractor in the mid-1980s and received its firstexport order only in 1989. Initial capitalization and financing of first orders were sourced from theowner's retirement pay, a loan from the Urban Livelihood Program of TLRC, where the owner hadmortgaged his real estate, and an interest-free loan from his mother-in-law. These funds were,however, easily depleted because of simultaneous orders received by the firm. The owner had to

reject an order worth $43,000 because he could no longer finance it.

However, at the time of the interview, the owner was worried about a $180,000 orderthat necessitated importation of fabrics worth $64,000 (P1.37 million). Since he was already pressedfor funds, the owner tried three banks for a possible loan.

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One of the banks gave the impression that no collateral would be required, but at loannegotiations the bank insisted that the exporter put up hard collateral as surety. The two otherbanks required hard collateral from the start, and since the exporter's only real estate is alreadymortgaged with the Urban Livelihood Program, the owner had no other surety to offer. One ofthe banks, however, offered to assume this collateralized loan, with the condition that the mortgagebe transferred to the bank. The owner seemed willing to accept this offer except that the bank wasoffering only P2 million.

With interest of 20% discounted upon release, and part of the loan to be ased up forpaying the P400,000 loan with the ULFP, only P1.2 million would effectively be left for funding theexporter's raw materials. Aside from the insufficient amount for imports, no allocations were madefor the firm's operating capital.

CASE 6. Indirect Exporter In Leather Good Sector

Banks' emphasis on hard collateral has affected not only direct export firms but espe-cially those talented manufacturers who cannot get off the ground to start exporting because theycannot get export loans. One such manufacturer is the exclusive supplier of very good qualityleathergoods to a renowned footwear and leathergoods exporter.

Because of financial constraints, this manufacturer/supplier could not afford to increasehis production capacity to supply other exporters. Thus, the manufacturer is highly dependent onthe orders of the one exporter. Since the exporter's policy is to pay its suppliers two weeks afterdelivery, the manufacturer/supplier uses his own funds to pay the salaries of his workers. Usuallypayment from the exporter is used for the purchase of the imported raw materials needed for theleather jackets and bags. The raw materials are scrap leathers sold by a leather glove manufacturingfirm inside the Baguio Export Processing Zone.

From late 1988 into early 1989, the supplier received export orders from at least threefirms, from Australia, Canada and Japan, but has turned them down because of lack of financing.The exporter has tried to avail himself of a loan of P500,000 from a local commercial bank.However, his only real estate property was in a rural region, and its low appraisal value amountedto only P250,000.

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VI. IMPORT FINANCING FOR EXPORT PRODUCTION

6.01 This chapter reviews the current status and reform needs of import financing for exportproduction in the Philippines. The next chapter reviews export financing for domestic input purchase andvalue-added components, as well as financing for indirect exporters.

6.02 Preshipment export financing is composed of production financing for export manufacturersand inventory financing for trading companies. Production financing can be further classified into:

(i) financing of imported inputs for export production,

(ii) financing of domestically produced inputs, and

(iii) financing of the value-added components of export production.

Also, financing for indirect exporters (i.e., producers of domestically produced inputs and outputs of exportcommodities) must b2 included in preshipment export financing.

A. Export Manufacturers Sample Survey Results

6.03 After electronics firms, which import almost all of their raw materials, the garment sectorimports the next largest volume of raw materials (Table 9)--about 77% of garment exporters use importedraw materials. All these materials are imported duty-free, most often through customs bonded warehousesowned by large garment firms. Similarly, textile mills import 100% of the yarn for producing exportablefabrics, either through their own customs bonded warehouses on a consignment basis or through directimporting.iN

6.04 The majority of the small and medium export manufacturers' imports based on import LUCsare coursed through common customs bonded warehouses (Table 10). Exporters in the garment andelectronics sectors mainly use open account or consignment imports. Therefore, small and mediumexporters, except those benefiting from consignment imports in the garment sector, face critical importfinancing needs for their export production.

j8/ Some exporters in the gifts, toys and housewares category source their imported raw materialsfrom import traders because of the relatively small vIume. However, those who import morethan 50% of their raw material requirements source them through the common customs bondedwarehouses of the PITC and the Philippine Exporters Foundation. These are mostly exportersof ceramics and artificial plants and flowers who regularly import clay, glaze, and foliage.Fashion accessories firms import very little of their raw materials. However, manufacturers ofleather gloves, which is one of the top export earners of the country, import more than 80% oftheir raw material requirements, making glove manufacturing basically a subcontracting industry.Because of the inferior quality of Philippine leather, glove manufacturers source 100% of theirleather requirements from their parent companies abroad or directly from South America.

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Table 9: DISTRIBUTION OF SAMPLE (DIRECT EXPORT) FIRMSBY SHARE OF IMPORTED RAW MATERIALSRSUPPLIES/

ACCESSORIES IN TOTAL EXPORT VALUES

Number of Firms NumberImported Inputs (as % of export value) of firms who use Total

.. . __.. -.- imported materials NumberIndustry 0% 1%-30% 31%-50% 51%-100% (% to total) of Firms

Electronics 0 0 0 2 2 (100%) 2Garments 4 1 5 8 14 (77%) 18Textiles 0 0 0 2 2 (100%) 2Gifts, toys, andhousewares 16 4 4 4 12 (42%) 28Fashion leather 0 8 0 2 10 (100%) 10Furniture 4 4 2 0 6 (60%) 10Food 1 3 2 1 6 (85%) 7Footwear 0 3 1 0 4 (100%) 4

Total 25 23 14 19 56 81 !% to Total 30% 28% 17% 23% 69% 100%

g/ Does not include chemical exporter.

Table 10 DISTRIBUTION OF EXPORT FIRMS IMPORT CHANNELS AND METHODS OFPAYMENTS

Import Channels Methods of Payments for Import

CBWImport import Open Consign-

Industry Common Own Trader Total L/C Acoount ment Total

Electronics - 2 - 2 - 1 1 2Garments 12 2 - 14 12 8 20Textile - 2 2 2 1 3Gifts, toys and

housewares 8 - 4 12 8 - - 8Fashion leather 2 2 6 10 3 - 2 SFurniture 1 2 3 6 3 - 3Food 4 1 1 6 5 - 5Footwear 1 1 2 4 2 - 2Chemicals - 1 - 1 1 - 1

Total 28 13 16 57 36 1 12 49% of Total 49% 23% 28% 100% 73% 2% 25 100%

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B. Estimates of Import Financing Needs in the Next Three Years

6.05 Preliminary estimates of import requirements for non-consignment exports during 1989 to1992 (Tables 11 and 12) were made based on the following assumptions:

(a) Total export values by the export commodity groups will be the target values of theNational Export Strategy prepared by the Department of Trade and Industry.

(b) Share of non-consignment exports in total exports will be similar to past trends (Table 13).

(c) Import requirements for export production by the export commodity groups will be similarto past trends (see sample survey results) as reflected in the distribution data (Table 10)and in the aggregate data (Table 13).

6.06 These estimates indicate an import financing need of: $409 million outstanding for 1990,$557 million outstanding tor 1991; and $708 million outstanding for 1992. Note that these estimates arevery conservative in that the share of consignment exports (that will not require import financing support)will remain, more or less, similar to past shares. However, as stressed below, the Philippines needs todevelop a strategy to restructure its export industry towards a non-consignment orientation in order topromote backward linkages. Under such a strategy, import financing needs will be higher than estimatedhere.

C. Need for Foreign Currency Revolving Fund

6.07 As indicated in Chapter II, one of the major issues in the Philippine export finance systemis the absence of a foreign currency loan (FCL) scheme to support exporters' import financing needs. Insuccessful exporting economies, nothing has received higher priority than allocation of foreign exchange forimporting inputs needed for exports that earn additional foreign exchange. This has been accomplished byassuring automatic access to an FCL scheme for exporters.

6.08 In the Philippines context, there are at least three major reasons why the establishment ofan FCL scheme for exporters, based on an FCRF, would be critical for meeting their import financing needsas estimated above: First, import financing costs would be significantly reduced under an FCL schemesupported by a FCRF. Second, the implementation of an FCL scheme would be a first step towarddeveloping a truly transaction-based export, and associated import and domestic purchase, financing system.Third, an FCL scheme supported by an FCRF would eliminate uncertainty regarding exporters' access toforeign exchange that may stem from any future foreign exchange crisis The first two reasons areelaborated further below.

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Table 11: EXPORT TARGETS AND ESTIMATES OF IMPORT REQUIREMENTSFOR PRODUCER GOOD EXPORTS (1989-1992)

(USS million)

Product Group 1989 1990 1991 1992

Electronics

Exports 1,755 2,197 2,664 3,268Consigned 1,035 1,296 1,571 1,928Unconsigned 720 901 1,092 1,339

Unconsigned imports 576 721 874 1,072

Chemicals

Exports 284 362 475 586Imports 128 163 214 264

Textile, Yarn & Fabrics

Exports 59 81 112 149Imports 30 40 56 74

Construction Materials

Exports 62 84 109 132Imports 25 34 44 53

Metal Manufactures

Expets 522 718 919 1,167Consigned 99 136 175 222Unconsigned 423 582 744 945Unsigned imports 84 116 148 189

Other Producer Goods /

Exports 336 453 585 842Imports 67 91 117 168

Total Import Requirements 910 1,165 1,453 1,820

a/ This category includes exports of machinety transport and equipment, non-metallic mam:factures, non-traditional petroleum products,and otber industrial manufactures, n.e.s.

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l'able 12: EXPORT TARGETS AND ESTIMATES OF IMPORT REQUIREMENTSFOR PRODUCER GOOD EXPORTS (1989-1992)

(US$ million)

Product Group 1989 1990 1991 1992

GarmentsExports 1,308 1,635 2,044 2,453

Consigned 850 1,006 1,186 1,310Unconsigned 458 638 8-9 1,153

Unconsigned imports 275 383 527 692

Gifts, Toys and HousewaresExports 288 363 487 610Imports 39 49 65 82

Fashion Accessories and Travel GoodsExports 211 264 362 466

Consigned 127 148 188 219Unconsigned 84 116 174 247

Unconsigned imports 30 42 62 88

FurnitureExports 214 258 312 372Imports 32 39 47 56

FootwearExports 89 109 134 161

Consigned 34 38 43 47Unconsigned 55 71 91 114

Unsigned imports 11 14 18 23

Other Consumer GoodsExports 66 107 153 247Imports 3 5 8 12

Processed Foods &IExports 219 262 313 383Imports 33 39 47 57

Total Import Requirements 423 570 774 1,010Add: Total import financ-ing requirements forproducer goodsexports (Table 12(a)) 910 1,165 1,453 1,820

Total Import Requirements 1,332 1,635 2,228 2,831Divide byr Ave. Turnover(ApproL = 4)Total Import FutancingRequirement (Outstanding) 333 409 557 708

Al Estimates are b sed on the share of non-traditional processed food exports to total non-traditional food exports.

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Table 13: ASSUMPTIONS MADE 114 PROJECTING UNCONSIGNED EXPORTS

Share of imported Shar of unconsignedinputs cost in aeports in

PRODUCr GROUP total export values (%) total xports

A. Producer Goods

1. Electronics 80 costant at 41%2. Chemicals 453. Textile, Yarn and Fabrics so4. Construction Materials 40S. Metal Manufactures 20 constant at 81%6. Others 20

B. Consumer Goods

1. Garments 60 pegged at 35% in 1989 based on1987 GTEB data with annualgrowth of 10%

2. Gifts, Toys &Housewares

a. 10% of elport targets 35

b. 90% of eport targets 11

3. Fashion Accessories & pegged at 40% in 1989 based onTravel Goods 1987 & 1988 DTI data with annual

growth of 10%

a. 10% of unconsigned porttargets 70

b. 90% of unconsigned exporttargets 32

4. Furniture 15S. Footwear 20 pegged at 62% based on DTI data

with annual growth of 5%6. Others S

C. Processed Foods 15

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Costs of Import Financing for Exporters

6.09 There are two potential areas of cost savings in borrowing foreign exchange for importrequirements:

* interest rates on foreign-denominated loans are typically lower than interest rates on localcurrency loans, and

e the margin between buying and selling foreign exchange rates is avoided.

6.10 Offsetting these possible gains is the possible depreciation of the currency during the loanperiod. A detailed mathematical framework for estimating the possible saving under a foreign currency loanscheme for imported inputs is presented in Annex IV. A simplified version and the results are discussedhere.

(i) Interest rate differential. The current cost of short-term deposits in the Philippines isabout 14% (the weighted average deposit rate for deposits under six months for the lastsix months of 1989). The onlending rate for working caphial loans is in the range of 18%-24% with implied spreads of 4%-10%. A convenient proxy for the cost of foreign-denominated loans is the World Bank rate, which is currently 7.7%. Adding to this aguarantee fee and handling fee of 0.8%, for example, the cost of such loans to thecommercial banks would be 8.5%. Assuming the same spreads, the foreign currency loanscould be onlent in the range of 12.5%-18.5%, representing a saving to exporters of 5.5%on an annual basis, or about 1.4% quarterly.

(ii) Foreign exchange commission. For local currency loans, the exporter has to obtain foreignexchange for his imported inputs at the buying rate and then convert his earning to pesosat the selling rate. The difference between these two rates is a margin that is avoided undera foreign currency loan scheme since all import transactions are paid and denominated inforeign currency. This margin can be significant. For example in the middle of 1989 thedollar buying rate was P22.25 while the selling rate was only P21.83, implying a 1.9% foreignexchange transaction cost. If we assume one transaction per quarter, the annual transactioncost amounts to about 8%.

(iii) Exchange rate depreciation. Any depreciation of the peso would be offset to some extentby the gains noted above in foreign currency loans. Since 1986, the peso has been depre-ciating against the dollar at a quarterly rate of 0.4%. This has been accelerating somewhat,such that the rate of quarterly depreciation during 1988 up to the third quarter of 1989 was0.8%. Significantly, this quarterly rate of decline has been less than the foreign exchangecommission cost.

6.11 What then is the overall impact of these three variables? It is not unreasonable to assumethat the relative relationships described above among the variables will hold, barring any major changes ineconomic conditions in the Philippines. Thus, if the risk of depreciation increases it would be reasonableto expect more or less offsetting increases in the differential between domestic and foreign interest ratesand a wider margin between buying and selling exchange rates. Therefore, using the recent levels of thesevariables provides an approximate guide to estimating the potential savings of an FCL

6.12 The import financing costs of an FCL compared to a local currency loan scheme such asthe EPL are set out in Table 14 below. The estimates assume four transactions per year and are based onthe 1990 estimate of $409 million in annual outstanding import finance.

6.13 Two cases are compared: Case I assumes a depreciation of the peso that reflects theaverage rate in 1988-89, and the second case assumes accelerated depreciation (about double the rate incase 1) that fully offsets the exchange rate margin. Under these asumptions, the foreign currency loanscheme would result in a net financing saving of US$24 to US$41 million for estimated 1990 manufactured

- 41 -

exports of about US$3 billion and their associated import requirements of US$1.6 billion. Thus, the importcost - effectively reduced by the equivalent of about 1.5-2.7%--a significant cost saving. The strong supportexpressed by exporters on the possibility of an FCL scheme supported by an FCRF is, more or less, basedon their feeling that the above cost savings can be realized.

Table 14: ANNUAL IMPORT FINANCING COST SAVINGS ESTIMATESFOR EXPORTERS UNDER AN FCL SCHEME

(Million US$)

1990 1991 1992

Estimated Import LoansOutstanding 408.5 556.9 707.7

Estimated Savings:

Case 1(1988-89 rate ofdepreciation} 40.9 55.7 70.7

Case 2{Accelerateddepreciation) 24.1 32.9 41.8

For assumptions and formulae see Annex 6.

Reforming Import Financing Disbursement Mechanisms for Exporters

6.14 Significant savings also are possible by streamlining the disbursement mechanism of importfinancing. The current import financing scheme in the Philippines has the dual characteristics of:

(i) back-to-back (to export L/C) import /C-based trade financing; and

(ii) collateral-tied credit line-based working capital loans.

6.15 If the import loan were strictly based on (i) (that is, strictly based on import L/Cnegotiation that creates imported inputs as collateral), the effective import loan period should be from thetime of the back-to-back import L/C negotiation to the time of the export L/C negotiation. However, sincethe current system actually uses a credit line approach (ii) for the majority of exporters, the effective importloan period is from the time of the back-to-back import [VC-opening (which is not much different from thetime of export L/C receipt) to the time of export LC negotiation. Furthermore, because of (ii), manypotential exporters fail to fill export orders. This is due to their failure to obtain import L/C lines and/orimport loan lines. This results from their lack of import L/C deposits and/or collateral to cover import LJCor/and import loans.

6.16 In this context it is recommended that modern disbursement be implemented within thecontext of the proposed FCL scheme supported by an FCRF. This would be done by requiring only "back-to-back LC based trade financing"--i.e element (i) above--and eliminating "collateral-tied credit-line basedloans"--element (ii) above. An effective PEFG scheme should be developed to replace (ii). In this regard,the highest priority should be developing import L/C and import loan guarantees at the initial stage of thePEFG scheme.

6.17 Under modern disbursement mechanisms for an FCL scheme, it would be possible to reducethe annual effective import loan periods substantially. For exporters with four annual turn-overs, andassuming that the average period from input L/C opening to negotiation is 1.5 months, and that from

- 42 -

import VIC negotiations to export L/C negotiation is also 1.5 months in a three-month export cycle, theimport loan period could be cut in half-on an annual basis, from 12 months to six months. Using the sameassumptions set out in Table 15, modernized disbursement mechanisms supported by an effective guaranteewould save up to an additional $30 million in import finance costs per year. Only part of these savingswould be needed to support an effective PEFO scheme and thus on this basis alone the scheme would bevery cost effective.

Table 15: ANNUAL IMPORT FINANCINGCOST SAVINGS ESTIMATES UNDER FCL SCHEME

WMIH MODERNIZED DISBURSEMENT MECHANISMS(Milion USS)

1990 1991 1992

Estimated Import LansOutstanding (S Mmilon) 408.5 556.9 707.7

Estimated Savings

case 1(1988-89 Rate ofDepredation) 70.0 95.3 121.1

Cae 2(AcceleratedDepreclation Rate) 53.2 72.5 92.1

Same assumptions as Table 14 above acept that loan period with modernized disburwment procedures estimatedto be cut by 50%.

6.18 Under modernized disbursement mechanisms for the FCL scheme, because the effective loanperiod for most exporters could be no more than six months, it may be possible to meet the importfinancing needs of all indirect exporters.

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VII. EXPORT FINANCING FOR DOMESTIC COMPONENTSAND INDIRECT EXPORTERS

A. Export Loans for Domestic Input Purchases

7.01 To institute export loan disbursement mechanisms that are parallel to the FCL disbursementmechanisms, it is necessary to separate the export loan for the purchase of dorxcstic !aputs from the exportloan for value-added components. Since domestically produced inputs come from indirect exporters(including subcontractors), the latter's access to export financing cannot be separate from that for directexporters. To design suitable export loan disbursement and liquidation mechanisms for both direct andindirect exporters, careful attention is given below to the current status of indirect exporters' access toexport loans (Table 16).

Table 16: DISTRIBUTION OF SAMPLE (DIRECT EXPORT) FIRMSBY PERCENTAGE OF DOMESTIC INPUTS IN EXPORT VALUE

Number of Furms Using Domestically Produced Inputs(As % of total sales)

Industry less than 30% 31-50% 51-75% Total

Electronics NA NA NA 2 A/

Garments 2 7 9 18

Texti - 1 1 2

Gifts, ToysHouseware 2 15 11 28

Fashion Acc.Leathergoods 8 2 10

Furniture 1 3 6 10

Food 2 S 7

Footwear - 2 2 4

Total 5 38 36 81

gI One electronics firms imports materials on consignment basis with local materials comprising anegligible percentage of sales. Tbe other firm failed to indicate respective percentages.

B. Export Loans for Value Added

7.02 The most important part of value added to be financed by export loans is labor costs. Asindicated clearly in Table 17, labor cost shares vary widely across industries and firms. Unlike exportfinancing for inputs, export financing for value added cannot create collateral with materials purchased withexport loans. Therefore, in dealing with the access problem associated with collateral requirements, theburden of a PEFG scheme is higher for the coverage of value-added loans than for import loans or domesticinput purchase loans. However, by linking the value-added loan disbursement to the back-to-back import

- 44 -

L/C-opening and the back-to-back domestic purchase LC-opening, part of the risk associated with the value-added loan could be reduced.

Table 17: NUMBER OF SAMPLE FIRMSSPENDING LABOR COSTS AS % OF TOTAL SALES

Industuy 10-20% 21-30% 31-60% Total

Electronics NA NA NA 2

Garments 9 7 2 18

Textile 2 0 0 2

Gifts, ToysHouseware 17 1 4 28

Fashion Acc.Leathergoods 8 2 0 10

Food 5 2 0 7

Footwear 2 2 0 4

Total 48 24 7 81

C. Export Loans for Indirect Exporters

ReUance on Subcontractors

7.03 Sample data indicate that small and medium-size export manufacturers rely more heavilyon subcontractors than do large exporters (Table 18). Large firms in the electronics, chemicals and textilesector (and some in the garment and furniture sectors) maintain large in-house workforces (more than 500employees), as shown in Table 11 of Annex III. On the other hand, the small workforce in such sectorsas handicrafts and garments is supplemented by an extensive subcontracting network (Table 19).

7.04 Among sampled firms, the distribution of exports manufactured by subcontractors, shownin Table 10 of Annex III, confirms that the greater proportion of gifts, toys and houseware exporterssubcontract 759-100% of their export production. Eighteen percent of garment exporters and 22% of gifts,toys and houseware exporters subcontract 20%-75% of their production.

7.05 The varying degree of dependence by garment, handicraft, footwear and furnitu. emanufacturers on subcontractors and the importance of this alternative workforce have prompted thaDepartment of Trade and Industry to establish the Subcontractors Exchange Agency (SUBCONEX). Theagency monitors subcontracting activities, offering assistance in skill development and matchingsubc.ntractors with potential contractor exporters. As shown in Table 20, as of April 1989 SUBCONEXhad a total of 2,600 registered subcontractors.

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Table 18: DISTRIBUTION OF SAMPLE EXPORT 1 I ;THAT RELY ON SUBCONTRACTORS BY FIRM SIZE AND JUSTRY

No. of Fins that Use Subcontractors

% of totalfirms cvered

Industry Small Medium Laue Total per industry

Garments 6 8 1 15 83%

Gifts, ToysHouseware 14 9 1 24 86%

Fashion AmLeathergoods 3 3 3 9 90%

Furniture - S 2 7 70%

Footwear 2 1 0 3 75%

Total 25 26 7 58 71%

Table 19 DISTRIBUTION OF SAMPLE FIRMS BYTOTAL NUMBER OF WORKERS HIRED THROUGH SUBCONTRACTORS

Fwrms that Employ Number of Workers

less than 501Industry 100 100-300 301-500 and more Total

Garments 2 9 2 2 15Gifts, Toys Houseware 8 8 5 3 24Fashion Acc. Leathergoods - 4 3 2 9Furniture 1 3 2 1 7Footwear 3 . 3

Total 14 24 12 8 58

-46-

MabMlc REOISThY OF TOTAL SUBCONiRACTORS ANDCONTRAC`IORS AS OF APRIL 1989

Contrao Subwontactora

NCR 281 1374RlaSI 3 1 37S

4 1 6936 67 10

10 1

283 24S9

ahand H_wmNCR 130 63Regios 1 1 3

2 13 44 1 75 1 36 2 17 1

10 4

140 84

-;CR 17 27

N CR 4S 20

NCR 1

NCR 1 6

NCR 2 2

Ormnd ToL Contclor. * 489Subcosact - 2601

7.06 Mms ae also special types of subcntractors, called satellites. Although their work is notmy d _but km the work of ordinary subcontractors, satellites work exclusively for the firm that

_uab w d, an uatellite heads and members are personally chosen by the export firm's productionaes"vbem Satelltes are organized 0oordlng to skill specialization. Three industries in paticular

- 47 -

subcontract d big portion of their export orders to their satellites: fashion accessories, garments, anddecorative pa,r products (a handicraft product).L9

Export Financing for Subcontractors

7.07 The livelihood of small subcontractors depends on exporters, in terms of financing and forimproving their skills. However, interviews with exporters who use subcontractors and with other indirectexporters reveal that although many exporters pay their suppliers and subcontractors on time (in thebasketwork, woodworks, and artificial plants industries), exporters of garments, leathergoods and some foodproducts tend to be remiss ir "--Ir payments. However, suppliers and subcontractors of medium-largeexporters are heavily dependei. the large volume of orders from these exporters. Our survey revealedthat indirect exporters or subcontractors are rarely granted production loans for the manufacture ofintermediate goods for export. If a supplier or subcontractor applies for a loan, it is not in his capacity assupplier or subcontractor to an exporter but as an ordinary businessman, which means the loans are subjectto the same (or more rigid) collateral requirements and constraints encountered by any borrower.

7.08 A number of small programs assist with subcontractor financing, however. These includethe LIVECOR Scheme, the Philippine Chamber of Handicraft Industries Program, Tulong sa Tao Program,and the Regional Chamber Program. Although these programs appear to provide important benfits to somesubcontractors, they are limited in scope, both in terms of coverage and loan size.

D. Introducing an Export Finance System for Indirect Exporters

7.09 The Philippines has not yet developed extensive backward linkages based on high-volumeexport items as have the successful East Asian developing and developed countries. For example, thePhilippines textile sector, which has a large production capacity, has not been integrated into the garmentexport industry as either direct or indirect exporter. This suggests that the potential for backward linkagesfrom manufactured exports has not been exploited. In sum, the fact that so many small and medium-sizedirect exporters have been exporting without much help from trading companies and that the large potentialfor backward linkages is not realized, clearly suggest the potential future contribution from small andmedium producers to the acceleration of non-traditional exports.

7.10 In this regard, establishing a finance scheme for indirect exporters is a priority matter.First, however, it is necessary to set guidelines and distinguish the category of subcontractors and indirectexporters who can have direct access to the EPL (Ineligible subcontractors may have to rely on directexporters for access to the EPL)

Direct Access to EPL by Indirect Exporters

7.11 Whereas indirect exporters are eligible for duty-free imports and BOI tax incentives(although the administrative arrangements to handle the incentives are still inadequate), indirect exportersare excluded from the EPL Failing to assure equal access to working capital export financing for indirect

aa/ One exporter of fashion accessories has about 10 satellite scattered on the outskirts of MetroManila, while a medium-sized garment firm has four satellites (with an aveage of about 150workes in each) assigned to four factories, aside from its regular eight subcontractors, whichhave an average of 100 workers each. This garment exporter has provided satellites with high-speed machines, which the satellites buy through regular deductions from their deliverypayments. A paper product exporter has 21 satellites in remote areas of the country, with anaverage of 15 people each. Professional artists head these satellites. Exporters provide fundsfor materials, labor, and equipment In return, the satellites are required to supply two newproduct ideas per month. One incentive for this requirement is a chance to earn 10%-40% ofthe gross profits made from the new designs.

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exporters hinders the development of backward linkages as well as the development of trading companies(which would allow for more efficient specialization in products, processes, and activities, including overseasmarketing). Thus, the rules and regulations of the EPL need to be revised to include indirect exportersin the eligible category.

7.12 It is recommended that the Central Bank design an efficient administrative instrument suchas the domestic letter of credit (DL/C) system. This would provide an automatic modernized mechanism,based on which indirect exporters would have direct access to the EPL and commercial banks could manageindirect exporters' access without much difficulty. (Introduction of such an instrument as the DUC systemwould be supported by the preparatory work that has already been done in the Philippines by a task forcecomposed of CB and commercial banks in relation to a proposed export development loan.A

7.13 One important additional advantage of the DVC system is that it is an effective instrumentfor administering other export incentives for indirect exporters, in particular, access to duty-free imports.However, it should be noted clearly that the introduction of the DVC system can hardly be successful unlessthe administrative arrangements for the EPL are modernized by linking the loan disbursement mechanismswith the import LC and DL/C negotiations. Such mechanisms would not only save the CB funds for pre-shipment export loans but also contribute significantly to effective management of PEFG operations. SincePEFG operations will also be closely related to the specific administrative arrangements of CB preshipmentexport loans, an integrated approach in designing these schemes is strongly recommended. Furthermore,modernized export financing procedures and mechanisms would provide the basis for streamlining the duty-free import administration.

I However, as the loan did not materialize, the plan was not implemented.

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VIII. POSTSHIPMENT EXPORT FINANCING ANDEXPORT CREDIT INSURANCE/GUARANTEE

A. Survey Results on Methods of Payments for Exports

8.01 The main method of payment for the majority of Philippines exporters (other thanconsignment exports) has been sight L/Cs (see exporters' re3ponses summarized in Tables 21 and 22). T71 isappears to be consistent with aggregate export financing data (see Chapter II, Tables 1 and 2) that indicatethe share of postshipment export loan is about 10% of total export loans make by the CB. Also, the dataappear to support an argument that an export credit insurance and guarantee system (ECI/G) that coversexporters and banks from "overseas buyers non-payment risk" may not have a high priority right now.

Table 21: DISTRIBUTION OF SAMPLE EXPORT FIRMSBY PAYMENT OF EXPORTS

Number of Firms Using Method of Payment

Sight UsanceIndustry LIC VIC D/A D/P Others Total

Electronks I - 2 3Garments 17 - 1 4 22Tadile 2 - - - 2Gifts, toys and housewares 24 2 2 4 12 44Fash/Leather 8 - - 2 4 14Furniture 10 - - 3 13Food 6 1 1 1 - 9Footwear 4 1 - - 5

Total 72 4 3 8 25 112(Percentage) (643%) (3.6%) (2.7%) (7.1%) (22.3%) (100%)

Table 22. NUMBER OF SAMPLE FIRMS RELY ON SIGHT UICsFOR PERCENTAGE OF FIRMS' EXPORTS

Industry 0 -50% 51 - 90% 91% and more Total

Electronics 1 - - 1Garments - 1 16 17Teatile - - 2 2Gift toys, and housewares 1 5 18 24Fash/Leatber 3 5 8Furniture 1 - 9 10Food 1 - 5 6Footwear I 3 4

Tobl 5 9 58 72(Percentage) (6.9%) (12.5%) (80.6%) (100%)

Xso -

B. Export Credit Insurance/Guarantee

8.02 In interpreting the structure of the export payment methods, it should be noted that thedominance of sight L/Cs may stem partly from the risk-aversive attitude of exporters and banks. Forexample, a footwear exporter made it a rule never to accept an order from a foreign buyer who could notopen an irrevocable sight L/C. This was because the exporter previously had difficulties collecting $10,000from a Middle Eastern buyer. An exporter from Baguio indicated that he dealt only with buyers he couldtrust in accepting payments through telegraphic transfers, because relying on the L/C mechanism wasineffective in Baguio.

8.03 In the case of these two exporters, it may be difficult to conjecture abou. any loss of exportorders stemming from the insistence of particular methods of payment. However, better ways to deal withbuyers' non-payment risks certainly need to be considered in future strategies for more aggresive exportpromotion in the Philippines.

8.04 It should be s.:essed that expertise required to manage an ECI/G agency that deals withnon-payment risks from importers is entirely different from that required to manage an effective PEFGagency. The former focuses on buyers' commercial and political risks; the objec#'ve of the latter is toaddress the risks of small or infant expoiters unable to meet export orders according to specifications oron time, due to their lack of technical, marketing and managerial skills.

8.05 Furthermore, the optimum timing and scale for establishing an ECUO agency have norelationship with the criteria for establishing a PEFG agency. Therefore, it is desirable to evaluate the needfor establishing the twc kinds of facilities quite separately. Although both functions could reside in thesame organization (for example, to save overhead costs or to consolidate efficient top managers), the actualoperation and accounting, as well as capital structures, need to be separate.

8.06 In 1984 the CB Export Finance Task Force conducted a field survey covering about 200exporters and 15 commercial banks in order to assess the need for a new ECI/G agency. Based on itssurvey, it concluded:

wThe Task Force is of the opinion that the need to activate the scheme may be consideredas not being immediate and thus may be deferred for a later period. The scheme'simplementa.ion may be postponed until such time that the country's export especially ofsemi-capital and capital goods have reached a certain degree of sophisticati' a which wouldwarrant the full support of the export credit insurance."

However, the Task Force also noted in its report that:

"There also seems to be an immediate need for a facility whereby exporters, especially thesmall and new exporters, can obtain reliable and first-hand information on the credit-standing of their buyers. It was, perhaps, for this reason that some exporters had incurredsubstantial losses in their business with new buyers. And may be one reason why someestabhshed exporters are reluctant to pursue new narkets other than their traditionalbuyers."

8.07 It should not be overlooked that the area indicated in the second statement is, in fact, oneof the imporant tasks of an ECVO agency. The information function of an ECLIG agency for the wholeexport community is as vital as the risk-pooling function for the success of ECUG operations. Even thoughcreation of an ECVIG may not be so urgent as an effective PEFO agency at this moment, there is noquestion that demands for ECUG activities, including information services, will increase as the Philippinesexport structure becomes more sophisticated and as more active export marketing efforts are pursued.Therefore, the optimum timing and scale for a new ECI/G need to be reviewed carefully.

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ANNEXES

ANNEX I

bMJOR FINANCING PROGRAMS FOR SMEs

EligibeImpleseing Bo nuwes/ Interst Rate Repayment DebV Colaterlregs ArciProes ject LoAn Pupoes Loan Amount Few Tet n Equity Rquiments

DBPs FincingPrgams forSMFa

A. Bk-to- DBP Head DBP Depoators Based on amuent 4% over deposit rate ried-up with None Holdout on depositBack Lon Office and its 57 (Savings, time, tmst) of deposit/ maturity ofBaunbes plaement placement;mximnum of 1yr. for savings

B One-sot -Same - ManunfturesV Purae of raw m rials 70%40% of Floating; one-time One-time, 7030 Real estate mortggeTfanacton eoterstader an amount of front-end fee of 1.5% depending on (REM); REM andotber clients ened pucase ore to 20% of amount of proect cce chattel mortpgein related undertaking, loan appWved (CHM) asignment ofwho bve substatial ID proceedS, bankpurchase ordenr deposits

C Credit ln - ae - Borrower in need of Woking Capital Depending oa - same- I yeasr, resewable - same - - e -working capital project needs but nnot to exceedP50 million

D. Term Lon - s - Manufacta (a) Working Cpitl - me - - same - Maxima of S "am - same -erpotlrs/traderal yearwbool/>msportaoa (b) Aquisutioa of fixdnd other undaking ae

with plans to acquirefied ssets (e) Contction of

btuing

Z Epoi hIndumy Oversas EWpostr-oiented SMEs, (a)Acqtisition of fixed Maximum of 8 34% on outstanding For fuixd asets, 70 30 100% coered, 70%Moderaizn Ecomic wit ssets size o not As P5.0 million balance, 20-25% maximum of 10 hard asets, 30% otierProps. (EIMP) Cooptia more than P10.0 initiallr, higer penalty charge for Yar grace asetsFond (OECF) milion and with (b) Coea tion of limits for oas delinquent loans period of 1-2Technolog modeniztion plans buildis for comn yanivelibood facilties servingResoure Center (c) WOking Capita! many firms on a(lRC) case-to-cae basis

3. Gutntee FPnd OFSME and Api-bsed prec - ame - Maximum of Vaying, set quarter For worting 80-20% Proectasets; jointfor Sma and Aaudited P8.0 million origination fee (one- capital, maximum and solidazy signaturesMediua Fnancial time) of 3%; guarantee of 5 yean; for of prncipal bonmmEnDtpise Institution fee of 2% pa. of total ftod ase,(GFSME) (Govment and loan outstuading; other maximtum of tenPrivate chargen but not to (10) yearDevelopmt and emeed L 5% p.s. of inclusive of twoCommerial totl outstanding lOan (2) grace periodBanks)

M2jor Flancg Prpnina for SMEs

mlematiag BEmai latwd Rate Repayent Deb Colatel

Progm Agecie Pzrft Loa Pupem Lan Amot Fe Tem Equity Reqairemnt

4. lndmull Cenl Bk Mnuactring projects (a) Acquiition/ Mamism of P16 Maximum of 1% p-n; For woking 70:20 2D% gua tee forOunatee LA and aweditd (SMEB) conatic of facoy smiiom guarantee fee of 2% capitl. 7 yean; coiltrl deficientFud financial site p.s; penalty fee of 5% for flud _met cottag and amISH

ijsttiom p.s; and oae-time 12 yen with 3 eutepmreur rl(b) Purhe of find ievice cag of l%- yra pce period eae sot

ase 15% (REM) and chated-owv

(c) Woring Capital

5. Pbippina Ph egunrae Eapoet.oeued Working Capital Maium of P4 18% p..; guatee - - P usi onExpon nd anfctuu and siliou fee of 15% p.-; la1teab held by theForein Lan vic exponr svice fee Of 2% ad bank on feledOurate Cop fili fee of UtO of _o dtlom(Piluanee) 1% of guatee aig_nt of contracts

accommodation. sa~~~~~~~d receivables; jointand seral $igtur

ang lEil Mkca co,tt an d - - Mxim of 16% pn Maximu of 5 8020 REM and CHMKabua at H and P200,0m o ym wit I yearKaunlarn nftrepreneurp grace w(B-KI) e

Kabuhoayna. KKKNoy- PML

7. AIctwral Cetal Bank Api_as same Depeding on foatng or sht-tr 80.2 REM and CHMLan Food ad Aredited entrprne prote seeds but loans, maximus

F baial aot o emed the of 12 mthelutitutiona single boenown aimuem of is

limit (1% of yars for ong-iprised let

capita of thebnk)

& AgIdutrial OECF and Ari-s pre - se - m m of P30 &'S% p pa . Mima. of tS REM ad CHMTechnolog TLRC with teceolob lliou yeas with 5Transfer Pr m trafer yea uce(AnlP) pa-

9. Techaolog TIRC R&D Institutio; (A) Pro pe Max of MRR 90+% p.s maximum of 5 REKCHM smigeiUtiuira Innom and PNivte Daelopmnt P500,0 yes Vt I year of reeivabls andSuppott S9_S Frm with Dvloped pe piod p(rUSS) or Pilot-tsd (b) Batb Producto

ommercially viable Market Teatmode of tcnoopmdwu (c) Working Capital

(d) Equity Amiance

Maw Famdng Pwpa for SME.

IP14emnII3g Dou,inB wI 1ami Rate Repet DOWV ClandlPl_pa A d PItNja Lo PM Lan Amoat Few Ter EqBg R _qubmgt

Ia Ua TIRC E mico- Wling C*l P5OD-PU00OG 15%p - _CuS mtpe

Uwibood -idPlopm pomby, pm mAn(ULIV) acqjalice of wHalen

11. Vlue Capital bJoi dat_Og Any SME *id my Satp; e S Depeding - - PjeaOf tdo er be: aid grwc apitl the _ne Of tb-M ad bualnm M*in-WM (a) Stm-p Cit ndcommurdal (b) c*icag Fgrot Potenia_im (c) ino of te eauqris

Sow Te Dwomt aBn of the Phppi

ANNEX 11

GUARANTEE ISSUES OF PHILGUARANTEE AND USAID

Table 1: ANNUAL GUARANTEE ISSUANCES OF PHILGUARANTEE BY TYPE(in perntage)

Aagc1980 1981 1982 1983 1984 1985 1986 1987 1988 share

capart ucdit 52.7 52.6 50.1 S6.7 61.7 81.0 73.0 44.0 S.0 583

Po"bipenteapor tadit - 03 2.2 3.4 14.9 - 7.0 8.0 1.0 4.1

Coapoa afdit 11.8 152 23.6 28.4 10.6 17.0 1&0 48.0 41.0 23.7

-Apo p _ovcticFane 35S 15.9 1.7 6.6 2.2 2.0 0 - - 8.7

E- d-0tfince 16.0 104 - 5.0 3.5

Reuramduantoe - - 4.9 10.6 - - 1.7

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Number of acwoutsou _t 24 82 83 76 42 35 17 18 1S

Sowe Puiguamtee

Table 2: ANNUAL GUARANTEE ISSUANCES OF PHILGUARANTEE BY SIZE

Small Scale Medium Scale Large Scale

Amou.nt X to total % to total X to total TotalNo. of No. of of Armual No. of No. of No. of Arnual No. of No. of No. of Awmual Amt. ofYear Firms Accms. Gtees. Issuances Firms Accms. Gtees. Issuances Firms Accms. Gtees. Issuances Gtees.

1980 12 14 7.4 25.0 7 7 10.6 35.5 5 5 11.7 39.4 29.7

1981 39 44 18.2 32.6 25 30 27.4 49.3 5 7 10.0 18.1 55.6

1982 35 53 20.8 32.0 21 30 29.7 45.8 6 7 14.3 22.2 64.8

1983 29 44 22.0 39.5 16 24 26.2 47.0 3 5 7.6 13.5 55.8

1984 18 24 10.9 28.9 13 22 23.8 63.1 1 1 3.0 7.9 37.7

1985 6 8 5.2 27.0 7 10 13.7 73.0 - - - - 18.9

1986 4 2.3 33.0 10 17 19.8 67.0 - 22.1

1987 4 5 2.8 10.0 3 5 22.8 90.0 - - - 25.6

1988 3 6 3.7 10.0 8 12.0 22.0 90.0 - - - - 25.7

Total 93.3 196.0 46.6 335.9

X Share 30.0 60.0 10.0 100.0

Source: Philguarantee.

Tabte 3: ANNI GUARANTEE ISSUANCES OF PlILGUARANTEE BY PRWUCT(in miltion pesos)

1980 1981 1982 1983 1984 1985 1986 1987 1988

At. X to Amt. X to AMt. X to Ant. X to Amt. S to Amt. X to Amt. X to Amt. X to Amt. I to Total X toProd. of A,nuaI of Arwust of AiveAl of Arual of Amusl of Anival of AAl of Amual of Auvaa ktt. of TotalGroup Gtees. Total Gtees. Totat Gtees. Totat Gtees. Total Gtees. Total Gtees. Total Gtees. Total Gtees. Total Gtees. Totat Gm.es. Aut.

Ga.ments 12.7 42.7 14.5 26.1 18.6 28.7 16.6 29.7 14.7 39.1 10.5 56.0 12.0 54.0 12.5 49.0 7.4 3.0 119.5 36.0

Baodierafts 2.7 9.2 8.1 14.6 12.6 19.4 15.2 27.2 7.1 18.7 5.1 27.0 6.4 29.0 6.1 24.0 11.0 4.0 74.3 22.0

Footwear 3.6 12.1 7.6 13.6 10.3 15.9 6.9 12.3 4.1 10.8 - - . - 32.5 10.0

Services 2.2 7.3 7.6 13.7 7.8 12.0 3.9 6.9 3.7 9.8 0.4 2 ^ 0.4 2.0 - - 1.4 1.0 27.4 8.0

Furniture 1.3 4.2 3.0 5.4 2.8 4.3 3.5 6.3 5.9 15.6 2.9 lD.0 3.3 15.0 6.9 27.0 5.9 23.0 35.5 11.0 >

Fresh adprocessed food 6.9 23.3 4.3 7.7 1.1 1.7 1.3 2.4 0.2 0.6 - - 13.8 4.0

ftectronics - 3.0 4.6 5.5 9.9 -----* ---- 8.5 3.0

Others 0.3 1.2 10.5 18.9 8.6 13.4 3.0 5.3 2.0 5.4 - - * - - - - - 24.4 7.0

TotaL 29.7 100.0 55.6 100.0 64.8 100.0 55.9 100.0 37.7 100.0 18.9 100.0 22.1 100.0 25.5 100.0 25.7 100.0 335.9 100.0

Source: Ph1 Iguarantee.

-58.

Table 4: LOAN PORTFOLIO GUARANTEE - PRIVATE SECTOR REVOLVING FUND OF USAIDTHE PHIUPPINES AS OF SEPTEMBER 30, 1989

Funding (MM) Terms Dibursement

ProjectNamc of Dank Loan Rate Grace Term S % Discription

1985 ObUzated Prolects

Far East Bank & Thust 1 2.0 3 year 1.5 yn S yia 2.0 MM 100 Guarantee generatesT-note at least $4 milionplus.1% in credit to smal and

medium-sized pre-aportfirm

1986 Obligated Prolects

Bank of the PhilippineMluands 2.4 90 Day 2 ym 5.5 yra 0 0 Guarantee generates

T-BI $4.8 mlUion to financeplus .6% small and medium-sied

rural agri-business

Maro Bank 2.1 90 Day 2 ys 5.5 yn. 500,000 24 Guamntee generatesT-BUI $4.2 milUon to financeplus .5% nrurl lending.

Philippine CommacialInternational Bank 2.4 90 Day 2 ym 55 yrs. 2.4 MM 100 Guarantee generates

T-Bili $4.8 million to financeplus .375% rural lendingtosmal and

medium enterprises.

1988 Oblizated Proiects

Far East Bank andTrust n 2.186 3 Month 24 mos. 6ys 0 0 Guarantee generates

T-Bill from $4.372 million in loansplus .6% 6frt to business

disbure- importing U.S.ment capital goods

Soure: AID, Private Sector Revolvna Fund. Annual Renort Fical Year 198I

- 59 -

ANNEX mH

CHARACTERISTICS OF SAMPLE FIRMS AND 11EIR EXORT FINANCE INSTRUMENTS

Tble 1: DISTIIBUTION OF SAMPLE FIRMS BY(DIREtCT AND INDIRECT EXPORTERS)

FIRM SIZE AND INDUSMRY

Industay Small Medlum LA Total

Eectronks 0 0 2 2

Garments 15 (7) S 2 25 (7)

TEtle 0 0 2 2

Gifts, Toys &Housware 20 (3) 10 1 31(3)

Fashilon Amo &Leathegoods 5 (1) 3 3 11(1)

FunIture 1 7 2 10

Food 4 (2) 2 3 9 (2)

Footwear 2 1 1 4

Chemkals 0 0 1 1

TOWal 47 (13) 31 17 95 (13)

Nose Fgpures in the parntheses are number of indirct exporte.

Aset value of:small size exporter - P500,000 - PS miNionmedium size exporter - P500,000 - P20 millionlarg size exporter - more than P20 mIion

- 60 -

Table 2 DISTRIBUTION OF SAMPLE FIRMS (DIRECr EXPORTBRS)BY ANNUAL EXPORT SALES AND INDUSTRY

Annual Export Sals

Less than $100,000- $500,000- $1.0 M More thanIndustry $100,000 $S00,000 $1.0 M S10.0 M $10.0 M Total

Electronics - - - - 2 2

GarmentsSmall S 2 1Medium - 1 4 4Large I - 1 - 18

Tettile - - - 1 1 2

GTHSmall 8 8 - IMedium - 4 4 2Large - - - I - 28

Fash/LeathSmall - 2 1 1Medium - 1 2Large - I - 1 1 10

FurnitureSmal - 1 1 -

Medium 4 3 1 10

FoodSmaU 2 - -Medium - 1 1 - 3 7

FootwearSmall 2 -Medium - - ILarge 1 . 4

Chemal - - - - 1 1

Total 15 24 19 16 8 82

- 61 -

Table 3: DISTRIBUTION OF SAMPLE FIRMS (DIRECT AND INDIRECT EXPORTER)BY LEGAL CLASSIF1CATION AND INDUSTRY

SingleIndustry Proprietorship Partnership Corporation

Electronics 0 02

Garments 5 112

TCile 0 02

Gifts, Toys &Houseware 11 1

15

Fashion Acc. &Leathergoods 1 0

9

Furniture 0 010

Food 0 07

Footwear 0 04

Chemicals 0 0l

Indirect exporter 9 04

Total 28 265

* 62 -

Table 4: DISTRIBUTION OF SAMPLE FIRMS (DIRECT EXPORTER)ACCORDING TO MARKET DESTINATION

AND BY INDUSTRY

Market Destination

[ady Purely Ep ExtIlIDomettc

Electronics 2 0

Garments 9 9

Teltile 0 2

Gifts, Toys and Houseware 13 1S

Fa"hn Accessories andLatbergoods 8 2

Furnture 7 3

Food 4 3

Footwar 0 4

Cbemial 0 1

Total 43 39

-63.9

Table 5: SAMPLE EXPORT FIRMS (DIRECr AND INDiREC1)BY INDUSTRY AND LOCATION

BicutanManila Paranaque MandaluyongMakati Taguig Pasig Antipolo Pampanga

Industry O.C. Laguna Cainta Marikina Baguio Cebu Albay Others Total

Electronic 1 1 2

Gaments 15 1 2 18

Textile 2 2

Gffts, ToysHouseware 14 2 3 1 3 1 3 1 28

Fashion Acc./Leathergoods S 1 4 10

Furniture 4 6 10

Food 4 2 1 7

Footwear 1 3 4

Others 1 1

Indirect 3 6 1 1 2 13

Total 48 12 9 S 5 11 3 2 95

.64.

Table 6a: USE OF VARIOUS EXPORT FINANCE INSTRUMENTS BY SAMPLE FIRMS

PrepaymentOther & Other

PITC Trnde Self- Private Supplier's Consign- BankTotal EPL TLRC Finance Finance Lender Credit ment Loans

A Small Size Sample Firms

(a) Number of firms using instrument5 12 15 33 20 20 5 18

(b) Total sample size 47

(c) % of (a) In (b) 10.6% 25.5% 31.9% 70.2% 42.6% 42.6% 10.6% 38.3%

(d) Relative Importance of instrument W100% 3.9% 11.7% 9.4% 25.8% 15.6% 15.6% 3.9% 14.1%

B. Medium Size Sample Firms

(a) Number of firms using instrument11 4 12 17 11 23 4 4


(c) % of (a) in (b) 35.5% 12.9% 38.7% 54.8% 35.5% 74.2% 12.9% 12.9%

(d) Relative importance of instrument It100% 12.8% 4.7% 14.0% 19.8% 12.8% 26.7% 4.7% 4.7%

C. Large Size Sample Finns

(a) Number of Frrms using instrument11 1 1 9 0 10 6 8


(c) % of (a) in (b) 64.7% 5.9% 5.9% 52.9% 0% 58.8% 35.3% 47.1%

(d) Relative importance of instrument SI100% 23.9% 2.2% 2.2% 19.6% 0% 21.7% 13.0% 17.4%

D. Total Sample Firms

(a) Number of firms using ins% 'ment27 28 17 59 31 53 15 30

(b) Total sample size 95 28.4% 17.9% 29.5% 62.1% 32.6% 55.8% 15.8% 31.6%

(c) % of (a) in (b)

(d) Relative importance of instrument J100% 10.4% 6.5% 10.8% 22.7% 11.9% 20.4% 5.8% 11.5%

/ Relative importance of instrument is measured by relative frequency of using instrument i.

i.e., Number of firms usint instrument i£ Number of firms using instrument i

Source: Table 6b

- 65 -

Table 6b: USE OF EXPORT FINANCING INSTRUMENTfSBY SAMPLE FIRMS

Other Prepayment Other PITCTrade Supplier's Self- Consign- and Private and

Size Industry EPL Finance Credit Fmancing ment Bank Loans Lendem TLRC Total

Large Electronics 0 0 0 1 2 1 0 0Large Garments 1 0 2 1 1 1 0 0Large Textile 0 1 1 1 1 1 0 0Large Housewear 1 0 0 0 0 1 0 0Large Leather goods 3 0 2 2 2 0 0 0Large Furniture 3 0 2 0 0 2 0 1Large Footwear 1 0 1 2 0 0 0 0Large Food 1 0 1 2 0 2 0 0Large Chemkals 1 0 1 0 0 0 0 0Large Exportems 0 0 0 0 0 0 0 0

Large Totals 11 1 10 9 6 8 0 1

Large Grand total 46

Large Percentages 23.9 2.2 21.7 19.6 13.0 17.4 0.0 2.2 100

Medium Electronics 0 0 0 0 0 0 0 0Medium Garments 3 3 8 4 3 1 4 0Medium Textile 0 0 0 0 0 0 0 0Medium Housewear 4 3 4 8 1 1 4 2Medium Leather goods I 1 2 3 0 0 0 0Medium Furniture 3 4 6 0 0 1 1 2Medium Footwear 0 1 1 0 0 1 1 0Medium Food 0 0 2 2 0 0 1 0Medium Chemicals 0 0 0 0 0 0 0 0Medium Exporters 0 0 0 0 0 0 0 0

Medium Totals 11 12 23 17 4 4 11 4

Medium Grand total 86

Medium Percentages 12.8 14.0 26.7 19.8 4.7 4.7 12.8 4.7 100

Small Electfonis 0 0 0 0 0 0 0 0Small Garments 1 5 5 4 4 0 4 2Small Textile 0 1 1 1 1 1 0 0Small Housewear 1 7 8 10 0 11 7 6SmaUl Leather goods 1 1 0 3 0 2 2 1Small Furniture 1 0 1 1 0 1 1 0Small Footwear I 1 2 0 0 0 2 1Small Food 0 0 2 2 0 1 0 0Small Chemicals 0 0 0 0 0 0 0 0Small Exporters 0 0 1 12 0 2 4 2

Small Totals 5 15 20 33 5 18 20 12

Small Grand total 128

Small Pecentag. 3.9 11.7 15.6 25.8 3.9 14.1 15.6 9.4 100

Table 7: NUMBER OF SAMPLE FIRMS RELYING ON INSTRIJMENTFOR PERCENTAGE OF FINANCING EXPORTS

EPL and Prepayment Other PITCOther Trade Suppliers Self- and Private andPeretage Fmace Credit Fnancing Consignment Bank Loan Lenden TLRCof

Fmancing Exports S M L S M L S M L S M L S M L S M L S M L

0 27 8 6 27 8 7 14 14 8 4?. 27 11 29 27 9 27 22 17 35 27 16

1-30 4 1 0 13 8 1 7 5 5 3 2 1 4 1 1 6 5 0 3 0 0

31-50 9 9 4 5 12 S 5 10 3 1 2 2 8 1 4 10 2 0 4 3 1

51-75 6 8 7 2 3 4 11 2 1 1 0 1 6 1 3 4 2 0 4 1 0

76-100 1 5 0 0 0 0 10 0 0 0 0 2 0 1 0 0 0 0 1 0 0

Total 47 31 17 47 31 17 47 31 17 47 31 17 47 31 17 47 31 17 47 31 17

AvengePercentagefor TotalFirms 18.8 42.3 35.1 11.1 25.4 27.4 39.7 19.4 15.1 3.1 3.5 19.6 16.1 6.6 21.3 15.7 9.0 0.0 11.5 S.9 2.4

Note S - Small size sample frmsM Medium size sample firmsL = Large ize smplefirms

/ Weighted average. Due to the reportig errors, the -m of the total avage percentages eceed 100%.

Total avge pernt for S = 116Total arage peraent for M - 112Total aveag percet for L = 121

- 67 -

Table 8: DITRIBUTION OF FIRMS BY A.VERAGE NUMBER OF ANNUALTURNOVER OF EXPORT LOANS BASED ON 4X.

1-3 4-6 7 or moreIndustry time times

Garments 8 4 1

Tetaes 1 0 0

Gftsi Toys &Houseware 3 7 4

Fashion Am &LAsthegoods 1 4 2

Furniture 6 2 2

Food 1 0 0

Footwear 1 2 1

Chemkals I 0 0

Total 23 19 10

Table 9_ DISTRIBUTION OF FIRMS ACCORDING TOAVERAGE PRODUCTION PERIOD

less thanIndUst 30 30-45 46-60 61-90 91-180 Tota

Elclwonks 2 - - - 2

Gannents - 2 6 S 5 18

Textile - I - 1 - 2

Gifts Toys& Houwae - 17 9 2 - 28

Fabion Acm& Leathgoods - 3 3 4 - 10

Fumniture - I 5 3 1 10

Food 0 S 2 - 7

Footwear 0 1 2 1 - 4

Total 2 30 27 16 6 81

-68 -

Table 10: DISTRIBUTION OF SAMPLE FIRMS BY PERCENTAGE OFEXPORTS 1:1ANUFACTURED BY SUBCONTRACTORS

Number of Firms Relying on % of Fxport ComponentsManufactured by Subcontracton

Industry less than 20% 20-50% 51-100% Total

Gaannents 1 11 3 15

Gifts, Toys& Houseware 1 13 10 24

Fashion Acc.& Leathergoods 1 6 2 9

Furniture 2 3 2 7

Footwear 3 0 0 3

Total 8 33 17 58

Table 11: DISTRIBUTION OF SAMPLE FIRMS BY SIZE OF IN-HOUSE WORK FORCEby Industry

Industry less tnan 100 101-300 301-500 501 and more Total

Electronics - - 2 2

Garments 7 6 4 1 18

Tetile - - 2 2

GTH 19 7 2 28

Fash/Leath 5 4 - 1 10

Furniture - 6 2 2 10

Food 4 - 3 7

Footwear 2 1 1 4

Chemicals - I I

Total 37 24 8 13 82

- 69 -

ANNEX IVFRAMEWORK FOR ESTIMATING COST SAVINGS

OF FOREIGN CURRENCY LOAN SCHEME

1. Net Export Earning Under Domestic Currency Loan System. The net export earning in peso aftersubtracting import financing costs during a quarter under the current system can be expressed as:

S $ B d$X.E - M.E (l+r (k)), (1)

T 0

where $X = quarterly export earning in dollar

$14 c quarterly import bill in dollar (needed to produce $X)

SE peso-dollar selling exchange rate for export (i.e., peso per $)T

at the end of the quarter (i.e., at the time of negotiating

export L/C).

BE peso-dollar buying exchange rate at the beginning of the0

quarter (i.e., at the time of receiving export L/C and

opening import L/C).

dr = annual interest rate on domestic currency export loan.

2. Net Export Earning Under FCL Scheme. The net export earnings in peso after subtracting importfinancing costs during a quarter under FCL scheme can be expressed as:

$ f S[$X - M (1 + r(l/4))] E (2)

T

fwhere r - annual interest rate on FCL which would be a short-term international

market rate plus a FCL-handling margin.

Note that unlike in the current system, there is no need to purchase foreign currency with borrowed localcurrency for import financing under a FCL scheme, because exporters borrow in foreign currency and payback in foreign currency from export earnings. Under the principle of paying actual financing costs,exporters are supposed to pay a short-term international market interest rate (which is the true opportunitycost of the borrowing by the government, even though the borrowing cost from an international financingagency like the World Bank might be slightly different) plus a handling margin.

- 70 -

3. Import Financing Cost Savings Under FCL The difference between equation (1) and equation(2) is the import financing cost savings measured in peso during a quarter under an FCL scheme:

S $ S f($X.E - M.E (1+r (k))) -

T T

S $ B d($X.E - M.E (1+r (k)))

T 0

E$ B d T fM.E [(l+r k) - (-) (1+r l%)]

C s

S SE E

$ A d 0 T f- Is M.E [(4+r ) - (-) (-) (4+r )] (3)

O £ SE E. O

Estimated Cost Savings: Table 1 and 2 show the estimated import finance cost savings under alternativecases with the application of these formulae.

Table 1: IMPORT FINANCING COST SAVINGS UNDER FCL SCHEME UNDER ALTERNATIVE ASSUMPIlONS(USS Milion)

1990 1991 1992

Quarterly import requirementsfor exportems 409 557 709

Estimated Savines:

Case 1 40.86 55.65 70.71Cas 2 24.12 32.8 41.76Case 3 69.96 95.27 121.10Case 4 53.22 72.47 92.12

- 71 -

Case Assumptions:

Case 1: Includes net effects of interest differential, foreign exchange margin and recent exchangerate depreciation.

Case 2: Case 1 with accelerated quarterly rate of depreciation equal to margin on foreign exchange

Case 3: Case 1 with half of effective loan period

Case 4: Case 2 with half of effective loan peiiod

Detailed case assumptions are set out in following table.

Table 2: SPECIFIC CASE ASSUMPTIONS

CASE 1 CASE 2 CASE 3 CASE 4

Foreign ExchangeSelling Rate SEnd Period (P4$): E 22.00 22.22 22.00 22.22

t

Foreign Exchange SSelling Rate E 21.83 21.83 21.83 21.83Beginning Period (P/$): °

Foreign Exchange bBuying Rate E 22.43 22.65 22.43 22.65End Period (P/S) t

Foreign Exchange bbuying Rate E 22.25 22.25 22.25 22.25Beginning Period o

(P4):

Annual Interest Rate dor EPL Loans (%): r 20.0% 20.0% 20.0% 20.0%

Annual Interest Rate fon FCL Loans (%): r 14.5% 14.5% 14.5% 14.5%

Quarterly Rate ofPcso Depreciation (%) 0.8% 1.8% 0.8% 1.8%

Average Loan Period (days) 90 90 45 45

- 72 -

1. CB circular No. 1203: The Monetary board Resolution No. 518 dated June 23, 1989.

2. In 1984, a floating interest rate system was adopted by charging the Manila Reference Rate(weighted average of the interest rate paid during the immediately preceding week by the tencommercial banks with the highest levels of outstanding deposit substitutes on promissory notesissued by such banks) less 2% for non-traditional exporters and MRR for traditional exporters.Subsequently commercial banks have been allowed to determine a lending rate without anygovernment's involvement.

3. This report uses the term 'export packing loan" (EPL) rather than 'export packing credit' in orderto distinguish clearly 'bank loan' from 'bank credit'. A bank lends money when it provides a 'loan;'a bank lends 'credit," only when it created a letter of credit (L/C) or bankers' acceptance (BA)without requiring collateral. See Yung Whee Rhee, Trade Finance in Developing Countries, Policyand Research Series No. 5, The World Bank, 1989.

4. The Central Bank circular No. 806 (June 26, 1981).

5. Number of annual transactions for the total CB export loans were 3,666 in 1988. Assuming that onaverage one exporter's turn-over for the preshipment export loan was 4 (Table 4) and one exporterused 4 post-shipment export finance transactions, one can conjecture that 458 exporters receivedthe export loans.

6. The PITC and the Philippine Exporters' Foundation operate the two separate CCBTWs. GArment-related imports are not allowed in these CCBTWs.

7. See Yung Whee Rhee, Trade Finance in Developing Countries, Policy and Research Series No. 5,The World Bank, 1989 for the basic difference between PEFG and ECI/G.

8. Information on this program may be incomplete, because it is based on interviews of a fewPhilippine bankers.

9. AID is currently required to maintain a reserve account equal to "not less than 25 percent' of theamount of the Agency's outstanding contingent liabilities under the Guarantee Program. In otherwords, for every $1.00 held in reserve AID may issue $4.00 of guarantees.

10. However, as the loan did not materialize, the plan was not implemented.

- 73 -

REFERENCES

Cooper, Richard N. (1989). 'Discussions" in Vittorio Corbo, Morris Goldstein, and Moshin Khan (ed.)Growth-Oriented Adjustment Programs. Washington, D.C.: International Monetary Fund andthe World Bank, 1989.

Economic Advisory Group (1980). "Some Aspects of Public Policies Towards Small Business in Japan."Shell UK, Ltd.

Goodhart, Charles (1988). The Evolution of Central Banks. Cambridge: The MIT Press.

Levitsky, Jacob and Prasad, Ranga N. (1989). Credit Guarantee Schemes for Small and MediumEnterprises. World Bank Technical Paper No. 58. World Bank: Washington, D.C.

Rhee, Yung Whee (1989a). Trade Finance in Developing Countries. Policy and Research Series No. 5.Policy, Planning and Research. The World Bank

Rhee, Yung Whee (1989b). 'Managing Entry into International Markets: Lessons from the East AsianExperience" Industry Series No. 11. The World Bank.

Stiglitz, Joseph and Weiss, Andrew (1981). "Credit Rationing in Markets with Imperfect Information."American Economic Review. 71:333-410.

Stiglitz, Joseph (1989). "Markets, Market Failures, and Development." The American EconomicReview: papers and proceedings of the 10th Annual Meeting of the American EconomicAssociation, May 1989.

World Bank (1987). The Philippines: Issues and Policies in the Industrial Sector, Volume II: PolicvAnnexes. The World Bank: Washington, D.C.

- 74 -

GLOSSARY OF TECHNICAL TERMS

Confirmed letter of credit (IJC): The advising bank (the beneficiary's bank), at the request of the issuingbank, confirms the credit.

Consignment sales: The exporter retains title to the exported commodities and agrees that payment willnot be required until the goods have been sold.

Document against acceptance (D/A): A term (or usance) trade bill of exchange that allows up to 180 daysfor payment involving documentary collection.

Document against payment (D/P): A sight trade bill of exchange that requires payment on demandinvolving documentary collection.

Documentary bank bill of exchange: A documentary credit (letter of credit) is extended to the seller onbehalf of the foreign buyer.

Domestic letter of credit (DLIC): A document created by a bank based on the master export letter ofcredit on a back-to-back basis. It declares to the direct exporter that the bank will pay, on behalf of thefinal exporter, a bill of exchange drawn on it when the indirect exporter submits a bill of exchange and areceipt that the commodities have been delivered to the final exporter.

Export credit insurance and guarantee (ECIG): Insurance for exporters and guarantees for export financingbanks against overseas buyer nonpayment risk.Export packing loan (EPL): Philippine designation of preshipment export loans rediscounted with theCentral Bank.

Foreign currency loan (FCL) scheme: Scheme that separates the import requirement of exporters' workingcapital needs, and finances them with loans denominated in foreign currency.

Letter of credit (VC): A document created by a bank on behalf of a buyer that declares to the seller thatthe bank will pay a bill of exchange drawn on it by the seller as long as the delivery and shipping conditionshave been met.

Medium-and long-term postshipment financing: Financing for export of heavy industrial products on creditfor more than 180 days.

Negotiation: An intermediary bank's purchase of the bill of exchange (including transmitting them to theissuing bank and waiting to be reimbursed by that bank). Negotiation is normally undertaken with recourse.

Preshipment export finance guarantee (PEFG): A preshipment export finance guarantee(PEFD) agencyprovides guarantees to banks extending preshipment export financing against exporter nonperformance riskand other default risks.

Preshipment export finance: Preshipment export financing (normally for a period of less than 90 days) isneeded to pay for: (1) imports of foreign raw materials and intermediate inputs; (2) domestic raw materialsand intermediate inputs; (3) the domestic value-added components (such as wages, interest rates, and rents)needed for export production; and (4) inventories of finished commodities to be exported.

Short-term postshipment financing: Short-term postshipment financing finances export sales on credit,normally for up to 180 days.Sight bill of exchange: A sight bill of exchange is a bill of exchange that requires payment at sight.

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Sight letter of credit A sight letter of credit is a letter of credit that permits the seller to draw a sightbank bill of exchange.

Usance letter of credit: A usance letter of credit is a letter of credit that permits the seller to draw a term(or usance) bank bill of exchange.

INDUSTRY SERIES PAPERS

No. 1 Japanese Direct Foreign Investment: Patterns and Implications forDeveloping Countries, February 1989.

No. 2 Emerging Patterns of International Competition in Selected IndustrialProduct Groups, February 1989.

No. 3 Changing Firm Boundaries: Analysis of Technology-Sharing Alliances,February 1989.

No. 4 Technological Advance and Organizational Innovation in theEngineering Industry, March 1989.

No. 5 Export Catalyst in Low-Income Countries, November 1989.

No. 6 Overview of Japanese Industrial Technology Development, March 1989.

No. 7 Reform of Ownership and Control Mechanisms in Hungary and China,April 1989.

No. 8 The Computer Industry in Industrialized Economies: Lessons for theNewly Industrializing, February 1989.

No. 9 Institutions and Dynamic Comparative Advantage Electronics Industryin South Korea and Taiwan, June 1989.

No. 10 New Environments for Intellectual Property, June 1989.

No. 11 Managing Entry Into International Markets: Lessons From the EastAsian Experience, June 1989.

No. 12 Impact of Technological Change on Industrial Prospects for the LDCs,June 1989.

No. 13 The Protection of Intellectual Property Rights and IndustrialTechnology Development in Brazil, September 1989.

No. 14 Regional Integration and Economic Development, November 1989.

No. 15 Specialization, Technical Change and Competitiveness in the BrazilianElectronics Industry, November 1989.

INDUSTRY SERIES PAPERS cont'd

No. 16 Small Trading Companies and a Successful Export Response: LessonsFrom Hong Kong, December 1989.

No. 17 Flowers: Global Subsector Study, December 1989.

No. 18 The Shrimp Industry: Global Subsector Study, December 1989.

No. 19 Garments: Global Subsector Study, December 1989.

No. 20 World Bank Lending for Small and Medium Enterprises: Fifteen Yearsof Experience, December 1989.

No. 21 Reputation in Manufactured Goods Trade, December 1989.

No. 22 Foreign Direct Investment From the Newly Industrialized Economies,December 1989.

No. 23 Buyer-Seller Links for Export Development, March 1990.

No. 24 Technology Strategy & Policy for Industrial Competitiveness: ACase Studv of Thailand, February 1990.

No. 25 Investment, Productivity and Comparative Advantage, April 1990.

No. 26 Cost Reduction, Product Development and the Real Exchange Rate,April 1990.

No. 27 Overcoming Policy Endogeneity: Strategic Role for DomesticCompetition in Industrial Policy Reform, April 1990.

No. 28 Conditionality in Adjustment Lending FY80-89: The ALCID Database,May 1990.

No. 29 International Competitiveness: Determinants and Indicators,March 1990.

No. 30 FY89 Sector Review Industry, Trade and Finance, November 1989.

No. 31 The Design of Adjustment Lending for Industry: Review of Current Practice,June 1990.

INDUSTRY SERIES PAPERS cont'd

No. 32 National Systems Supporting Technical Advance in Industry: The BrazilianExperience, June 26, 1990.

No. 33 Ghana's Small Enterprise Sector: Survey of Adjustment Response andConstraints, June 1990.

No. 34 Footwear: Global Subsector Study, June 1990.

No. 35 Tightening the Soft Budget Constraint in Reforming Socialist Economies,May 1990.

No. 36 Free Trade Zones in Export Strategies, June 1990. (not yet published)

No. 37 Electronics Development Strategy: The Role of Government, June 1990

No. 38 Export Finance in the Philippines: Opportunities and Constraints forDeveloping Country Suppliers, June 1990.

No. 39 The U.S. Automotive Aftermarket: Opportunities and Constraints forDeveloping Country Suppliers, June 1990

No. 40 Investment As A Determinant of Industrial Competitiveness and ComparativeAdvantage: Evidence from Six Countries, August 1990 (not yet publf shed)

No. 41 Adjustment and Constrained Response: Malawi at the Threshold ofSustained Growth, October 1990.

No. 42 Export Finance - Issues and Directions Case Study of the Philippines,December 1990

Note: For extra copies of these papers please contact Miss Wepdy Young onextension 33618, Room S-4101

IENERGY SERIES PAPERS

No. I Encrgy Issues in the Developing World, February 1988.

No. 2 Rcview ot World Bank Lending for Electric Power, March 1988.

No. 3 Some COnsiderations in Collecting Data on Household Energy Consumption,Mfarch 198)8.

No. 4 Improving Power System Efficiency in the Developing Countries throughPerformance Contracting, May 1988.

No. 5 Impact of Lower Oil Prices on Renewable Energy Technologies, May 1988.

No. 6 A Comparison of Lamps for Domestic Lighting in Developing Countries, June1988.

No. 7 Recent World Bank Activities in Energy (Revised October 1989).

No. 8 A Visual Overview of the World Oil Markets, July 1988.

No. 9 Current International Gas Trades and Prices, November 1988.

No. 10 Promoting Investment for Natural Gas Exq 'oration and Production inDeveloping Countries, January 1988.

No. 11 Technology Survey Report on Electric Power Systems, February 1989.

No. 1t Recent Developments in the U.S. Power Sector and Their Relevance for theDeveloping Countries, February 1989.

No. 13 Domestic Energy Pricing Policies, April 1989.

No. 14 Financing of the Energy Sector in Developing Countries, April 1989.

No. 15 The Future Role of Hydropower in Developing Countries, April 1989.

No. 16 Fuelwood Stumpage: Considerations for Developing Country Energy Planning,June 1989.

No. 17 Incorporating Risk and Uncertainty in Power System Planning, June 1989.

No. 18 Review and Evaluation of Historic Electricity Forecasting Experience, (1960-1985), June 1989.

ENERGY SERIES PAPERS cont'd

No. 19 Woodfuel Supply and Environmental Management, July 1989.

No. 20 The Malawi Charcoal Project - Experience and Lessons, January 1990.

No. 21 Capital Expenditures for Electric Power in the Developing Countries in the1990s, February, 1990.

No. 22 A Review of Regulation of the Power Sectors in Developing Countries,February 1990.

No. 23 Summary Data Sheets of 1987 Power and Commercial Energy Statistics for100 Developing Countries, March 1990.

No. 24 A Review of the Treatment of Environmental Aspects of Bank Energy Projects,March 1990.

No. 25 The Status of Liquified Nature' Gas Worldwide, March 1990.

No. 26 Population Growth, Wood Fuels, and Resource Problems in Sub-SaharanAfrica, March 1990.

No. 27 The Status of Nuclear Power Technology - An Update, April 1990.

No. 28 Decommissioning of Nuclear Power Facilities, April 1990.

No. 29 Interfuel Substitution and Changes in the Wav Households Use Energy:The Case of Cooking and Lighting Behavior in Urban Java, June 1990.

No. 30 Regulation, Deregulation, or Reregulation--What is Needed in LDCs PowerSector? July 1990.

No. 31 Understanding the Costs and Schedules of World Bank Supported HydroelectricProjects, July 1990.

Note: For extra copies of these papers please call Ms. Mary Fernandez on extension33637 in the morning between 10 am and 11 am and in the afternoon between1:30 to 2:30 pm. From outside the country call: Area Code (202) 473-3637.FAX No. (202) 477-0547.

Documents

Export Finance-Issues and Directions Case Study of the ... · I I~~~ o ir-I INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER INDUSTRY SERIES PAPER No. 42 Export Finance-Issues and Directions