Domestic liquidity (M3) increased by 6.7 percent year-on-year as of end-April 2002 to reach P1.57 trillion compared to the 8.6 percent growth as of end-March 2002. The slowdown in the growth in domestic liquidity can be attributed in part to the softness in net domestic credits, despite recent signs of improvement in economic activity. In particular, credits to the public and private sectors as of end-April 2002 dropped by 2.8 percent and 3.8 percent, respectively, from their levels a year ago. The decline in domestic credits, however, was mitigated in part by the expansion in the net foreign assets (NFA) of the monetary system, consisting of the BSP and the commercial banking system. The combined impact of lower interest payments and gains from the appreciation of the peso has reduced the amount of debt servicing on the foreign exchange liabilities of the BSP and commercial banks, translating into gains in the country’s net foreign assets. Meanwhile, the decline in net domestic credits can be traced mainly to relatively low demand for credit by domestic firms due to the presence of spare capacity in the manufacturing sector, which limited corporates’ need for new bank loans. The average capacity utilization in March 2002 stood at 75.6 percent, slightly higher than the February 2002 level of 75.4 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 18.2 percent in March 2002.
Nevertheless, the favorable performance of the real sector in the first quarter of 2002 provides further evidence of the sustainability of the growth process. Real GNP and GDP grew by 4.9 and 3.8 percent, respectively, during the first quarter of 2002, a marked increase from the 3.4 percent and 2.9 percent growth rates, respectively, that were registered a year ago. On the demand side, the expansion of the economy in the first quarter was propelled by steady growth in consumer spending while the strong performance of the agriculture, fishery and forestry sector as well as the services sector lifted growth on the supply side. However, the growth of the industry sector was relatively lower at 1.9 percent in the first quarter, although this was an improvement when compared to industry’s growth a year ago. The slow growth in domestic credit could thus also be explained, by the fact that economic growth has been driven by sectors that typically are not credit-intensive (i.e., agriculture and services) rather than industry, which would have a higher demand for credit.
Going forward, the BSP will continue to watch vigilantly economic and financial conditions to ensure that an appropriate level of domestic liquidity is made available without creating price pressures. This is in line with the objective of maintaining price stability consistent with the economy’s growth path.