Domestic liquidity or M3 reached P1.365 trillion as of end-December 1999. At this level, the year-on-year growth of M3 accelerated to 19.3 percent from 15.2 percent in the previous month, the highest so far since February 1998. The surge in M3 growth reflected the monetary system’s preference to hold cash as buffer against potential Y2k-related demands. At the same time, this was also indicative of the seasonal increase in money demand to support increased consumer spending during the holidays.
In terms of composition, the increase in the end-December M3 level was on account mainly of the significant month-on-month growth in average reserve money from 7.2 percent in November to 22.6 percent in December as BSP relaxed its open market operations by allowing banks to build adequate cash in anticipation of heavy withdrawals for the Y2K glitz.
The expansion in domestic liquidity was accompanied by steady growth in loans outstanding of commercial banks reaching P1.354 trillion as of end-December 1999. At this level however, the year-on-year growth of banks’ loan portfolio slowed down to 0.5 percent from 1.9 percent registered in November 1999. Relative to the level in November 1999, bank lending declined by 1.4 percent in contrast to the positive 2.8 percent growth in November 1999 as banks restrained from active lending and opted to stay liquid. This was in anticipation of increased withdrawals from bank deposits for the holiday spending as well as a precaution for any potential Y2k computer glitches.
The growth of bank lending was accounted for by four sectors. Loans to the transportation, storage and communication rose by 5.6 percent month-on-month; wholesale and retail trade, 4.9 percent; electricity, gas and water, 0.9 percent; and manufacturing, 0.8 percent. Other sectors however, registered lower levels of bank lending in December 1999 compared to the previous month.
Despite the slowdown in the overall bank lending, sectoral data showed that the bulk of bank loans continued to be channeled to three major productive sectors of the economy. In particular, loans to the manufacturing sector, as a percent to total bank lending showed an improvement from 27.6 percent share in November to 28.2 percent in December. The share of the wholesale and retail trade sector also increased to 15 percent from 14.1 percent during the same period. Meanwhile, the share of the financial institutions, real estate and business services (FIREBS) declined to 25.3 percent from 26.9 percent, indicative of the banks’ more cautious stance.
With the slowdown in bank lending, the year-on-year growth of net domestic credit (NDC) of deposit money banks (DMBs) decelerated to 1.01 percent in December from 2.13 percent growth registered in November 1999. By sector, net domestic credits to the public sector grew significantly by 10.9 percent in December which more than offset the decline in private sector credits by 1.32 percent from their respective levels a year ago.
Despite the observed slowdown in overall credit in December, the growth in the demand for money as well as bank financing remained positive. The continued growth of credit is reflective of banks‘ efforts to satisfy credit demand in support of productive activities. This is essential in ensuring higher and sustainable economic growth. For its part, monetary policy will continue to provide a conducive environment to ensure the appropriate level of domestic liquidity while promoting stable price.