Based on preliminary data, domestic liquidity (M3) grew by 4.3 percent year-on-year to reach P1.63 trillion as of end-March 2003, a deceleration from the 6.3 percent year-on-year annual rise in February 2003 and the 8.6 percent year-on-year increase in March 2002. The moderation in M3 growth in March 2003 was traced in part to the one-percentage point increase in the liquidity reserve requirement for banks and the removal of the tiering scheme on banks’ placements with the BSP through the RRP window. At the same time, residents’ continued shift of their funds from peso deposits to dollar deposits, as shown by the double-digit growth in foreign currency deposits (15.2 percent) during the first quarter, also contributed to the deceleration of M3 growth. The slowdown was also partly a result of a base effect of the reduction in liquidity reserve requirement by 2 percentage points in January 2002, which contributed to a higher M3 level in March 2002.
In terms of its composition, M3 growth in March 2003 was fueled by improvements in both the private and public sector credits. Net domestic credits to the private sector posted an increase of 4.7 percent year-on-year as bank lending activity continued to recover. The growth in private sector credits in March 2003 was higher than the 4.4 rise in the previous month and is the highest increase recorded since June 2001. Meanwhile, net domestic credits to the public sector grew by 18.5 percent due to increased credits to the National Government (16.0 percent) and local government units (35.7 percent) in March 2003. The strong appetite for risk-free assets, combined with ample liquidity in the financial system, helped boost demand for government securities. The notable improvement in net domestic credits, particularly in the strong growth in private sector credits, reflects the continued pick-up in credit demand which has been supported by the monetary policy of the BSP.
The continued improvement in credit demand is consistent with the overall trend of strengthening domestic demand, which is reflected in various indicators of economic activity. For example, the average utilization of capacity in the manufacturing sector improved to 76.5 percent in February 2003 from 76.1 percent January 2003. Second, consumer lending activities continued to strengthen as banks’ credit card receivables grew by 4.8 percent year-on-year as of end-December 2002 compared to 1.6 percent as of end-September 2002. Third, commercial bank lending grew consistently by 4.4 percent in January and February 2003. Fourth, the year-on-year growth in Meralco’s energy sales rose by 5.6 percent in February 2003 from its level in January 2003, an improvement from the 7.3 percent decline in the previous month.
In the months ahead, monetary authorities will continue to emphasize caution while ensuring an appropriate level of liquidity in the financial system in support of the economy’s low-inflation growth path. The BSP will also continue to monitor closely the evolving macroeconomic conditions and price stability risks in order to anticipate any possible risks to the inflation outlook.