Liquidity growth slows further to 10.3% in June

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said domestic liquidity (M3) growth is still at a double-digit level, 10.3 percent in June, not too far from the 10.7 percent level in May. In a statement issued on Friday, Tetangco said M3 reached P3.972 trillion as of the end of June this year, about P373 billion higher than the P3.6 trillion level in June last year. "The steady expansion in domestic liquidity is in line with the strengthening internal momentum of the economy as domestic demand picks up and credit conditions improve," the BSP chief explained. The country's domestic output, measured by the gross domestic product (GDP), zoomed to its fastest growth in almost two years after expanding by 7.3 percent in the first quarter of the year from only 0.5 percent in the same quarter last year. This forced economic managers to revise the GDP growth target to five to six percent, replacing their earlier forecast of 2.6 to 3.6 percent. Tetangco pointed out that the 22.7 percent increase in net foreign assets (NFA) to P2.648 trillion from P2.157 trillion drove the domestic liquidity growth as of the end of June. The NFA of the BSP surged by 22.5 percent to P2.23 trillion as of the end of June, from only P1.823 trillion in June last year. This surge can be attributed to the expansion of its net international reserves by 22 percent to P2.26 trillion from $1.852 trillion. The NFA of other depository corporations, on the other hand, improved by 23.8 percent to P414.48 billion from P334.73 billion. On the other hand, the net domestic assets (NDA) retreated slightly by 0.9 percent to P2.485 trillion from P2.508 trillion due to the steady expansion of the net other items account. These include the revaluation, capital, reserves accounts and special depository account (SDA) placements of trust entities. Data showed that credits to the public sector increased by 9.4 percent to P1.37 billion as of the end of June this year, up from P1.25 trillion in last year. The rise can be attributed to higher credits extended to local government units and other public entities while loans to the private sector also went up by 8.1 percent to P2.74 trillion from P2.53 trillion. "Net domestic credits strengthened further as lending to both the public and private sectors grew steadily," Tetangco said. M3 is the amount of money circulating in the domestic economy. At a time when the economy is booming and money supply is expanding rapidly, the central bank normally steps in to mop-up to ensure that inflation would not surge. Liquidity growth is one of the important vehicles considered in determining the central bank’s monetary policy. Tetangco pointed out that monetary authorities would keep monitoring liquidity conditions closely and promote monetary and financial market stability. The BSP chief believes a growth of 10 to 12 percent on the domestic liquidity this year would not fan inflation. The BSP’s Monetary Board has kept its key policy rates steady at record lows after reducing overnight borrowing and lending rates by 200 basis points since December 2008 until July last year. The overnight borrowing rate is pegged at a record low of four percent while the overnight lending rate is at six percent. During the height of the global financial crisis, the BSP adopted several liquidity-enhancing measures to cushion the impact of the crisis on the domestic economy. These measures included: the higher rediscounting facility— from P20 billion to P40 billion and further to P60 billion charged with a rate of 3.5 percent; the reduction in the reserve requirement of banks from 21 percent to 19 percent; the introduction of peso and US dollar repurchase facility, and the reduction of its key policy rates by 200 basis points. Given ample liquidity and the continued stability of financial markets, the BSP's Monetary Board decided to keep its policy rates but started phasing out liquidity-enhancing crisis response measures. Monetary authorities raised the rate on a short-term lending facility to four percent from 3.5 percent. They also further reduced the peso rediscounting budget from P60 billion to P40 billion and back to the pre-crisis level of P20 billion. The authorities likewise restored the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and restored the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points. -- VVP/OMG, GMANews.TV