Money supply growth picks up in October on RRR cuts

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MONEY SUPPLY expanded at a faster pace in October as the policy easing moves by the Bangko Sentral ng Pilipinas (BSP) were finally felt in the financial market.

Domestic liquidity or M3, the broadest measure of money supply in an economy, grew 8.5% year-on-year to P12.1 trillion, a faster pace compared to the 7.7% growth logged in September, according to preliminary central bank data released on Friday.

Month-on-month, M3 inched up by 0.9%.

The central bank said credit demand mainly fueled money supply growth.

BSP data showed net claims on the central government climbed 6.5%, picking up from the six percent growth in September.


Meanwhile, domestic claims, which were mainly supported by the private sector, rose 6.7%, slower than the upward-revised 7.8% seen in September.

The BSP noted that loans for production activities remained to be buoyed by lending to key sectors such as real estate activities; financial and insurance activities; construction; electricity, gas, steam and air conditioning supply; and wholesale and retail trade, as well as repair of motor vehicles and motorcycles.

Meanwhile, net foreign assets (NFA) in peso terms picked up by 9.6% in October, a wider expansion from the 8.3% print logged in September. The BSP said the NFA position in the month was backed by foreign exchange inflows coming mainly from overseas Filipinos’ remittances, business process outsourcing receipts, and foreign portfolio investments.

NFA held by banks likewise grew by 12.2%, rebounding from its 3.2% contraction in September. This growth was attributed to the banks seeing bigger foreign assets “as a result of higher loans and investments in marketable debt securities”, according to the central bank.

Analysts attributed the pickup in liquidity growth to the BSP’s easing actions.

“The uptick in liquidity is a long time coming. With the expansionary stance of the central bank this 2019, the rise in M3 is in line with market expectations,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an emailed response.

The faster expansion rate was on the back of the series of reserve requirement ratio reductions this year, according to Rizal Commercial Banking Corp. chief economist Michael L. Ricafort.

“The faster M3 growth as of October may largely have to do with the RRRs…to infuse a total of more than P400 billion of additional peso funds into the financial system (more than P300 billion infused as of October 2019),” he said in an email.

Despite the boost in liquidity, bank lending expanded at a slower pace in October.

Outstanding loans of universal and commercial banks grew by 9.3% in October, slower compared to the 10.5% growth in September. Inclusive of reverse repurchase agreements, bank lending rose 9.1% in October, also a slower pickup compared to the 10.1% seen in the previous month.

BSP data showed production loans comprised 87.2% or the bulk of banks’ total lending, expanding at a rate of 7.5% in September which is lower than the 9% growth seen in September.

Construction loans remained to see the highest expansion at 28.9%, followed by credit for real estate activities at 18.4%; finance and insurance activities at 11.6%; electricity, gas, steam and air conditioning supply at 5.2%; and wholesale and retail trade, repair of motor vehicles and motorcycles at 3%.

Lending to other sectors also picked up in October, except credit for other community, social and personal activities which plummeted 34.4%, and the professional, scientific and technical activities, which fell 28%.

Meanwhile, loans for household consumption expanded by 26.7% in October, picking up from 26.2% growth in September, thanks to the faster growth in motor vehicle, credit card, and salary-based general purpose consumption loans.

The slower loan growth may suggest that the financial system is still feeling the rate hikes imposed last year, according to Security Bank Corp. chief economist Robert Dan J. Roces.

“We are still reeling from the hikes of 2018, and loan growth will still take some time to turnaround as the financial system absorbs the cuts on lags. This absorptive capacity is churning — it is alive and well on the back of positive loan growth data,” he said in an email.

For UnionBank’s Mr. Asuncion, the credit growth lag is “expected”.

“Financial institutions and stakeholders usually takes time to adjust rates and may need some time to unwind. Although, the likelihood of lending activities rising in the next coming months is higher now compared to the previous months when liquidity in the market was low,” he explained.

Meanwhile, RCBC’s Mr. Ricafort noted that some firms opted to raise money through the capital markets which may have dented credit growth.

“Some of the biggest companies also borrowed recently through the bond/capital markets as alternative to bank loans, as part of capital market development, thereby partly resulting to the slower growth in bank loans,” he said.

Noting that players may still be in a wait-and-see attitude amid the series of cuts in policy rates and RRR, Mr. Ricafort is positive loan growth could pick up in the coming months due to the low interest rates.

The reserve requirement ratio of universal and commercial banks now stands at 15% following the effectivity of the 100-basis-point (bp) cut in RRR announced in September. Likewise, the RRR of thrift banks is now at five percent, while that for rural banks stands at three percent.

The BSP announced last month that the reserve ratio of universal, commercial and thrift banks will be slashed by another 100 bps effective December, bringing total reductions to their reserve ratios for this year to 400 bps. This cut will also apply to the reserve ratio of nonbank financial institutions with quasi-banking functions (NBQBs).

This will bring the reserve ratio of universal and commercial lenders to 14% by December, while the RRR of thrift banks will stand at four percent. On the other hand, the reserve ratio of NBQBs will be cut to 14% next month.

Meanwhile, the BSP’s Monetary Board this month kept its benchmark interest rates for the overnight reverse repurchase, overnight deposit and lending facilities at four percent, 3.5% and 4.5%, respectively.

The BSP has cut rates by a total of 75 bps this year, partially dialling back the 175 bps in hikes it fired off last year in the face of multi-year high inflation. — Luz Wendy T. Noble