Domestic liquidity (M3) grew steadily by 9.4 percent year-on-year to reach about P1.7 trillion as of December 2002. At this level, the growth in M3 has firmed up from the 9.3 year-on-year growth registered in the previous month. The sustained increase in M3 could be traced mainly to the continued expansion in the net foreign assets (NFA) of the monetary system, which is comprised of the BSP and the banking system. In addition, the steady rise in public sector credits supported the 4.0 percent year-on-year improvement in net domestic credits (NDC) in December 2002 after posting marginal growth rates during the past two months.
The seasonal inflow of dollars, including those from remittances of overseas Filipino workers (OFW) during the holiday season helped boost the NFA position of banks. Meanwhile, net domestic credits to the public sector, particularly to the National Government, rose by 10.5 percent year-on-year, supported by the strong demand for government securities amid ample liquidity in the system. Credits to local governments also recorded a hefty increase of 36.5 percent in December 2002. While private sector credits increased by only 0.1 percent year-on-year in December 2002, this reflected a marked improvement compared to the annual contraction recorded in the past 15 months.
The sustained rise in domestic liquidity in recent months is indicative of the underlying strength of economic activity. This also suggests that the stimulatory impact of the past monetary policy easing of the BSP has started to take effect on the real sector as evidenced by the robust expansion in the country’s real Gross Domestic Product (GDP), which accelerated to 4.6 percent in 2002 from the 3.2 percent growth a year ago. The strong performance in all sectors of the economy boosted output growth, which exceeded the target of 4.0-4.5 percent in 2002. In addition, the modest but steady recovery in bank lending observed in recent months could also signal the sustained expansion in domestic economic activity. Bank lending rose steadily for the period September-November 2002 after posting five months of year-on-year declines.
Going forward, with a manageable inflation outlook and improving domestic economic activity as well as the weaker-than-expected global economic recovery, the BSP will continue to provide the appropriate level of liquidity supportive of non-inflationary economic growth path.