Current levels of Philippine domestic liquidity or M3 and bank lending may not cause much concern at this time, but an official of the International Monetary Fund (IMF) warned that authorities should watch out where these funds are going to prevent potential risks from endangering the economy.
M3, or the amount of cash and cash-equivalent securities circulating within the economy, expanded by 34.8 percent in March, while bank lending grew at its fastest pace during the month at 20 percent.
In an interview with reporters on Friday, IMF Resident Representative to the Philippines Shanaka Jayanath Peiris said M3 growth of above 30 percent is a statistical issue and should not be a concern, but the risk of a credit surge and rising asset prices remains.
“When there’s a lot of liquidity, there’s always the risk that it can leak out to credit growth or to certain sectors including asset prices,” he said.
According to the IMF official, accelerating credit growth is a key sign to watch for potential risks in the financial system.
“If there are signs emerging that it [liquidity]is really creating this kind of excessive credit growth and asset price growth, you probably need to do some action,” he said.
However, Peiris said that 20 percent growth in bank lending recorded in March is not “extremely worrisome” for a fast growing economy like the Philippines.
“Many countries in Asia has credit growth of 20 percent or at least had . . . so it’s not unusual. Credit growth-to-gross domestic product in the Philippines is quite low compared with other countries, so it’s somewhat catching up on financial deepening, which is also positive,” he said.
The IMF official said that the important thing to watch out for is where these loans are going, adding that the fact that credit is growing very strongly only to a few sectors is probably more worrying than its 20 percent growth.
“That’s more important to watch. So looking at credit growth, it’s a bit growing faster at construction and real estate. That is probably a more important thing to watch than the aggregate number itself,” he said.