Preliminary data as of end-June 2004 indicate that domestic liquidity (M3) grew by 5.7 percent year-on-year to P1.74 trillion. This was a slight deceleration from the 6.1 percent year-on-year growth in the previous month. Data also showed that growth in M3 after seasonal adjustment was 0.3 percent month-on-month for June, likewise a deceleration from the 1.4 percent rise in May.
The growth in M3 in June was attributed to increased net foreign assets (NFA) of the monetary system and improved net domestic credits to both the public and private sectors. Net foreign assets of the monetary system rose by 2.8 percent in June, owing mainly to the increase in the gross international reserves of the BSP and a decline in its net foreign liabilities. Meanwhile, domestic credit activity continued to be fueled by borrowings of the public sector, which rose by 21.6 percent in June. Credits to the private sector grew steadily, although still modest at 3.0 percent in April compared to the 3.1 percent rise in the previous month.
The growth in the demand for money, however, as reflected in M3 data, has remained comparatively lower than the recent historical trend. Average year-on-year growth in M3 during the period 1999-2003, for example, was comparatively higher at 8.6 percent. The observed modest improvement in credit activity of the private sector can be traced, in part, to continued spare capacity in manufacturing. Moreover, economic activity has been driven by the less credit-intensive sectors of the economy including agriculture. Subdued credit conditions have also been associated with structural conditions in the banking sector, where bank lending activity continues to be partly dampened by prevailing levels of non-performing loans among banks. Given that stronger credit activity is a key ingredient to sustained economic expansion in the medium term, the BSP remains committed to its efforts to reform and strengthen the financial sector, beginning with various measures to help banks in the disposition of their non-performing assets.
Going forward, monetary authorities will continue to provide an appropriate environment that will promote increased credit activities while guarding against further pressures on consumer prices.