Domestic liquidity (M3) reached P1.459 trillion as of end-November, indicating a year-on-year growth of 6.2 percent. The slowdown in M3 growth from 9.4 percent in October can be traced, in part, to the cautious lending stance of banks as well as to weak corporate demand for borrowings against the background of excess capacity, particularly among manufacturing firms.
Private sector credits contracted by 2.6 percent year-on-year in November, marking the third consecutive decline since September. This developed, as lending remained restrained by banks’ efforts to preserve the quality of their assets. Moreover, demand by corporates for loans was also limited by the presence of spare capacity in the manufacturing sector as average capacity utilization in October remained at the 75 percent mark. Latest data shows a 75.9 percent capacity utilization in October from 75.4 percent in September 2001.
However, public sector credit continued to expand in November by about 16.0 percent. As a result, there was an improvement in the overall growth of net domestic credits in the monetary system to 2.5 percent year-on-year in November from a 0.9 percent growth in October.
The series of policy rate cuts by the BSP from October 2001 to the latest 25-basis point cut effective 18 January 2002 as well as the restoration of the liquidity reserve requirement to its pre-July 2001 level are expected to help stimulate economic activity. With lower interest rates, corporate stress should ease and this should help improve the asset quality of banks. This development is expected to eventually encourage bank lending. Advance indicators of demand have already shown signs of some improvement in economic activity. December energy sales in Metro Manila increased by 5.0 percent year-on-year compared with only 3.5 percent in the previous month. Meanwhile, passenger car sales in December 2001 was up by 18 percent year-on-year from a 5.1 percent increase in November and year-on-year contractions for the most part of 2001.
Going forward, the growth-supportive monetary policy stance of the BSP in the light of a subdued inflation outlook is expected to translate into higher private sector credit growth and strengthen aggregate demand.