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Domestic Liquidity Growth Strengthens in October

12.11.2009

Demand for money strengthened in October as domestic liquidity or M3 growth accelerated to 12.5 percent year-on-year (y-o-y) from 11.6 percent in September. On a monthly basis, seasonally-adjusted M3 expanded by 1.7 percent in October, higher than the 1.2 percent (revised) growth posted in the previous month.

The steady rise in net foreign assets (NFA) which is associated with strong inflows from OF remittances continued to drive the expansion in domestic liquidity. NFA grew by 29.9 percent y-o-y in October from 24.2 percent in September, due mainly to the steady expansion in the BSP’s foreign assets at 22.8 percent.  In addition, the net foreign assets of other depository corporations rose by 80.9 percent as banks continued to pay off their foreign liabilities.

Meanwhile, net domestic assets (NDA) contracted at a faster pace of 3.2 percent y-o-y in October from 0.2 percent in the previous month, due largely to the continued acceleration in the negative growth of the net other items account. Net domestic credit remained strong as credit extended to the public sector expanded by 14.4 percent from 10.8 percent a month ago.  In contrast, the growth in credit extended to the private sector slowed down from 7.9 percent to 5.7 percent during the month. This could be due partly to the continued contraction in manufacturing and construction loans, given the still weak global demand for the country’s exports and the ongoing corrections in the property sector.

BSP Governor Amando M. Tetangco, Jr. noted that despite the continued growth in domestic liquidity, loan growth has remained moderate. Loan demand continues to reflect the still weak economic activity, while banks have preferred investments in safe assets given the risks associated with current global financial conditions. At the same time, he noted the increase in capital market activity through bond and note issuances. He said that the BSP will keep a close watch over developments in liquidity conditions to ensure that the country’s economic recovery proceeds at a non-inflationary pace.

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