BSP sees double-digit money supply growth

Published December 1, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

Domestic liquidity or the country’s money supply is expected to reach double-digit levels within the first half of 2020 due to higher government spending coupled with the release of fresh funds from banks’ lower reserve requirements, according to a central bank senior official.

“(The) liquidity growth has began to recover (and) we’re anticipating it will accelerate some more,” said Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr. “Our forecast for 2020 is an increase in liquidity growth to the lower double-digit levels so it will be more in line with the growth needs of the economy.”

Dakila said higher domestic liquidity will return and it will come from “a lot of several factors including cuts in reserve requirement ratio (RRR) and also from the acceleration in government spending.”

He said he is not worried that an influx of money supply – which is broadly measured as M3 – in the financial system will have no place to go other than back in the BSP’s fixed-income open market operations, namely the weekly term deposit facility (TDF) or the RRP market.

Dakila said as the economy expands, banks will have more projects to invest in and more borrowers to lend big money to, and not all of new liquidity will find their way back to the BSP.

The demand for projects that require financing will depend on how fast the economy is growing, he said. He also does not see what he called “several simultaneous factors that led to slower-than-expected growth in the first half of the year” as happening again next year as funds flow into the system.

“We have seen acceleration of growth to 6.2 percent in the third quarter … the economy is starting to pick up (so) you should have more demand for liquidity,” said Dakila.

The BSP on Friday reported that M3 grew by 8.5 percent year-on-year in October to ₱12.1 trillion, a faster pace of growth compared to September’s 7.7 percent. On a month-on-month seasonally-adjusted basis, money supply went up by 0.9 percent.

The BSP said there was sustained growth in credit to the private sector as evidenced by loans for production activities and for household consumption.

The last time M3 was in the low double-digit level was August 2018 at 10.5 percent. By the end of 2018, M3 stood at 9.5 percent after the BSP cut RRR by 200 basis points (bps).

In 2019, the central bank again reduced RRR by 400 bps and the last 100 bps of the 400 bps total will take effect on Friday, December 6. Including adjustments to reserve requirement to bonds and on deposit substitutes, the reduction in RRR released about ₱450 billion into the financial system this year.

For this year however, M3 has dipped to its lowest level of 6.1 percent growth last March before slowly climbing to 8.5 percent by October.

ING Bank senior economist Nicholas Mapa said the RRR cuts, on top of the fresh peso liquidity from the BSP’s foreign exchange operations, have “boosted the amount of liquidity circulating in the financial system.” He said the “surge in government spending also helped released a fresh round of funds back into the financial system with expenditure growth remaining positive in September and October.”

But, Mapa said, even with the influx of liquidity, bank lending has decelerated, posting a 9.3 percent gain in October, down from the 10.5 percent expansion in the previous month.

“Despite the copious amount of liquidity released of late, demand for loans remains lackluster with investors opting to wait for lower borrowing costs now that inflation is sub-target. It’s becoming clearer that policy adjustments must be done in tandem with RRR reductions working together with policy rate cuts to help entice and foster investment activity,” he said.

 
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