M3 growth eases in June as demand for credit slows

MONEY SUPPLY growth slowed in June following the easing of quarantine measures and as funds went to other investment instruments.

Domestic liquidity or M3, the broadest measure of money supply in an economy, expanded by 14.9% year on year, slowing from the upward-revised 16.7% pace in May, data released by the Bangko Sentral ng Pilipinas (BSP) on Friday showed. M3 dropped by 1.1% month-on-month.

The slower M3 figure in June ended three consecutive months of quicker expansion since March.

The growth was mainly driven by demand for credit, the BSP said.

Growth in domestic claims eased to 13.3% from the 16.2% logged the prior month.

Net borrowings by the central government rose 53% in June, slower than the upward-revised 59.7% growth in May. The increase partly reflected the government’s higher funding requirements amid the coronavirus disease 2019 (COVID-19) pandemic.

Meanwhile, claims on the private sector, driven mainly by lending to non-financial corporations and households, also grew at a slower pace of 7.2% in June from 9.9% in May due to limited economic activity and weak business prospects.

On the other hand, net foreign assets (NFA) expanded by 15.3% in June, faster than the 12.1% rise in May.

“The BSP’s NFA position continued to expand, reflecting the increase in gross international reserves. Meanwhile, growth in the NFA of banks accelerated, as banks’ foreign assets rose on account of higher interbank loans, deposits with other banks, and investments in marketable debt securities,” the central bank said.

Liquidity growth slowed as the government lifted restriction measures meant to arrest the spread of COVID-19, said Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort.

“The local economy further reopened in June 2020 with the quarantine measures eased to GCQ (general community quarantine) starting, which could have fundamentally reduced some of the excess peso liquidity in the financial system amid the pick up in economic activities,” Mr. Ricafort said in an email.

Some “siphoning-off activities,” such as increased term deposit facility (TDF) offer volumes, may have also contributed to slower liquidity growth in June, he added.

The BSP suspended TDF auctions in March as the government placed the country under strict lockdown. It slowly resumed its offerings, starting with the seven-day term deposits in April and the two-week tenor in June. In July, the BSP began auctioning off 28-day deposits again, completing the three tenors offered under the facility.

Despite slower M3 growth in June, the central bank will likely hold off on further easing, said Alvin P. Ang, an economist from the Ateneo de Manila University.

“Another cut is unlikely because there will be muted economic activity due to the MECQ (modified enhanced community quarantine),” Mr. Ang said in a text message.

He said the current liquidity level is ample following the oversubscription seen in bond and initial public offerings.

The Monetary Board will review its policy settings on Aug. 20.

BANK LENDING CONTINUES TO EASE

Meanwhile, bank lending continued to ease for the third consecutive month in June, reflecting the deepening impact of the virus that slowed economic activity.

Outstanding loans disbursed by universal and commercial banks grew 9.6% in June, slowing from the 11.3% expansion pace in the prior month, preliminary data released by the BSP separately on Friday showed.

Inclusive of reverse repurchase agreements, bank lending increased by 8.2% also easing from the 10.3% pace in May.

The growth in credit came mainly on the back of production loans which made up 86.9% of total lending in June, even as it expanded at a slower pace of 8.3% that month versus the 9.8% logged in May.

The BSP said the growth in production loans was boosted by lending to sectors including information and communication (23.7%); real estate activities (16.8%), transportation and storage (11%); financial and insurance activities (10.6%); and electricity, gas, steam and air conditioning supply (5.4%).

Credit to other sectors also increased except for professional, scientific, and technical services (-5.5%); mining and quarrying (-2.8%); and manufacturing (-0.7%).

Meanwhile, loans extended to households also expanded at a slower rate of 26.7% from the 30.2% growth in May as restrictions and dimmer consumer confidence led to a slowdown in credit card, motor vehicle, and salary-based loans in June, the BSP said.

“The BSP continues to adopt measures to ensure the flow of credit to affected businesses and households, including a further reduction in the monetary policy rate as well as a cut in the reserve requirement ratios of thrift and rural/cooperative banks,” the central bank said. “Looking ahead, credit activity is seen to stabilize and pick up in the coming months, as economic activity resumes with the gradual reopening of the economy.”

“Going forward, the BSP will remain vigilant in monitoring domestic liquidity and credit dynamics as economic activity gradually resumes. The BSP stands ready to deploy appropriate measures as needed to ensure that liquidity and credit remain adequate to support domestic demand amid the ongoing health crisis,” the BSP said.

RCBC’s Mr. Ricafort said heightened activities in the capital markets may be one of the reasons for slower bank loan growth.

“These big businesses have learned to rely less on traditional bank loans as a source of funding, in view of the continued development in the local capital markets,” Mr. Ricafort said.

He added that bleak economic conditions, as evidenced by the wider contraction in gross domestic product in the second quarter, also lead to lower demand from various sectors.

The economy shrank by 16.2% in the second quarter following the 0.7% contraction in the previous three-month period, plunging the country into recession.

Mr. Ricafort said loan growth may continue to slow in the near term as demand for credit could decrease due to the fresh restrictions in Metro Manila.

On the other hand, he said the record low interest rate environment could spur loan demand. — L.W.T. Noble