Domestic liquidity (M3) grew by 6.7 percent year-on-year to reach P1.626 trillion as of end-February 2003, a deceleration from the 8.0 percent annual rise in January 2003 and the 7.2 percent annual increase in February 2002. The slowdown in M3 growth in February 2003 can be traced partly to the base effect of the reduction in liquidity reserve requirement by 2 percentage points in January 2002. This contributed to the uptick in M3 in February 2002 which, in turn, tempered the year-on-year liquidity growth in February 2003.
By component, the growth in M3 in February 2003 was driven mainly by first, the sustained expansion of net foreign assets (NFA) of the monetary system—consisting of the BSP and the banking system—and second, the expansion in domestic credits of both the public and private sectors. The net build-up of international reserves by the BSP due to the reduction in its foreign liabilities as well as the increased US dollar purchases by banks helped beef up the NFA position of the monetary system. Meanwhile, net domestic credits to the public sector grew by 10.1 percent due to higher credits to the National Government (6.0 percent) and the local governments (38.8 percent) in February 2003. The strong appetite for risk-free assets combined with ample liquidity in the system helped boost demand for government securities. In addition, credits to the private sector grew steadily for the third consecutive month by 4.0 percent year-on-year in February 2003—after 15 months of contractions—as bank lending continued to recover.
Despite the moderation in the growth of domestic liquidity in February, a number of indicators of economic activity point to the continued improvements in domestic demand. First, the volume of production index (VOPI) rose above market expectations as it registered a 4.9 percent year-on-year rise in January 2003 as against the 6.1 percent decline in the previous month. Second, the value of production index (VAPI) expanded by 16.1 percent year-on-year in January, the highest recorded growth in almost two years since April 2001. Third, commercial bank lending also rose by 4.4 percent in January 2003 for the fifth consecutive month. Fourth, the year-on-year growth in Meralco’s energy sales peaked to a 33-month high of 11.6 percent in January 2003. Finally, the volume of passenger car sales surged by 14.6 percent month-on-month in January 2003, reflecting a marked turnaround from the 10.8 percent drop in December 2002.
Based on these encouraging improvements in domestic demand, the demand for money could strengthen further in the months ahead. Consistent with this, monetary policy will continue to provide appropriate level of liquidity in the system in support of the economy’s low-inflation growth path. The BSP will also continue to monitor closely the evolving economic and financial developments in order to preempt any possible risks to the inflation outlook.