Domestic liquidity (M3) grew steadily by 6.9 percent year-on-year to reach P1.57 trillion as of end-May 2002, a slight improvement from the 6.6 percent M3 growth as of end-April 2002. The steady growth in domestic liquidity can be attributed partly to the increase in net foreign assets (NFA) of the monetary system, arising from the decline in foreign exchange liabilities of financial institutions—partly due to the appreciation of the peso against the US dollar. In addition, banks’ preference for peso deposits to foreign currency deposits reduced the foreign currency liabilities of the monetary system.
The steady M3 growth in May was also supported by the significant increase in public sector credits which offset the decline in private sector lending. Public sector credits grew by 2.8 percent during the same period while credits to the private sector as of end-May 2002 dropped by 3.7 percent from the level a year ago. Commercial bank (KB) loans, in particular, registered an annual decline of 1.8 percent to reach P1.41 trillion in May 2002, an improvement from the 2.2 percent year-on-year decline in the previous month. The bulk of KBs’ outstanding loans continue to flow in the productive sectors of the economy: manufacturing; financial institutions; real estate and business services; and wholesale and retail trade, which comprise a combined share of nearly two-thirds of total KB loans.
The decline in private sector credits and KB loans, in particular, can be traced mainly to the relatively low demand for bank credit by firms despite recent signs of improvement in economic activity due to the presence of spare capacity in the manufacturing sector. The average capacity utilization in April 2002 stood at 75.3 percent, slightly lower than the March 2002 level of 75.9 percent. At the same time, banks’ lending activity has been constrained by the need for banks to contain any possible build-up in their non-performing loans (NPLs), which stood at 18.4 percent in May 2002, up from18.2 percent in April 2002.
Domestic liquidity growth, however, is expected to gain some strength in the months ahead given that there are signs of improved economic activity, which will enhance greater demand for liquidity. Among others, the volume of production (VOPI) and value of production index (VAPI) of manufacturing rose by 17.0 percent and 14.9 percent, respectively, a welcome reversal from the annual declines registered in March 2002. Merchandise exports likewise registered 2.7 percent cumulative increase in May 2002, up from the 0.4 percent year-on-year cumulative increase in the previous month. Meanwhile, demand for electricity has been on the uptrend since April 2002. Meralco’s energy sales rose annually by 4.0 percent in May 2002 from 2.9 percent year-on-year increase in the previous month.
Going forward, the BSP will remain watchful of the evolving economic and financial developments to ensure that an appropriate level of domestic liquidity is made available while containing any possible build-up in price pressures. This is in line with the objective of maintaining price stability consistent with the economy’s growth objectives.