THE amount of money circulating in the financial system eased slightly in January amid a moderation in domestic claims, but bank lending continued to expand during the month, the Bangko Sentral ng Pilipinas (BSP) said on Wednesday.
Domestic liquidity or M3 expanded at a slower pace of 12.4 percent to P9.374 trillion in January, from a revised estimate of 12.7 percent in December. Seasonally adjusted month-on-month, M3 grew by 1.6 percent.
“Demand for credit remains the principal driver of money supply growth,” the central bank noted. Despite the slower growth, M3 remains consistent with the prevailing outlook on inflation and economic activity.
Domestic claims–the sum of net claims on central government and claims on other sectors–grew by 15.9 percent, down from a revised 17 percent in December.
The bulk of bank loans went into real estate; wholesale and retail trade and repair of motor vehicles and motorcycles; financial and insurance activities; electricity, gas, steam and air-conditioning supplies; and manufacturing.
Lending to the public sector rose by 19.2 percent, “as a result of the continued withdrawal by the national government (NG) of its deposits with the BSP as part of NG cash operations.”
Net foreign assets (NFA) in peso terms grew by 8.7 percent from the revised 7.8 percent in December, the central bank said. Its own NFA position continued to expand due to robust foreign exchange inflows, coming mainly from overseas Filipinos’ remittances, business process outsourcing receipts and portfolio investments.
The NFA of banks expanded as foreign assets grew faster on higher interbank loans, deposits with other banks and investments in marketable debt securities.
Land Bank of the Philippines market economist Guian Angelo Dumalagan said the still “abundant domestic liquidity together with higher inflation expectations might prompt the BSP to tighten its monetary policy settings by mid-year.”
After lowering its RRP rate to 3 percent from 4 percent on May 16 in the run-up to adopting an interest rate corridor system on June 3 last year, the central bank kept its key policy rate unchanged during its first meeting for 2017.
The policy-setting Monetary Board kept the corresponding rates for overnight lending and deposit facilities unchanged at 3.5 percent and 2.5 percent, respectively. It also left the reserve requirement ratio (RRR) unchanged at 20 percent.
Standard & Poor’s (S&P) Global Ratings earlier said the pressure will come mainly from the country’s robust gross domestic product (GDP) growth and rising commodity prices.
German lender Deutsche Bank noted a peso under pressure from a potential double-deficit in the fiscal and current account balances would provide the kind of prompt the central bank could not afford to ignore against the backdrop of rising inflation and domestic demand.
Fitch-owned BMI Research expects a likely tightening of monetary policy by the central bank before the end of 2017 as inflationary pressures rise, while the central bank attempts to stem capital outflows amid a more aggressive rate hike cycle in the United States.
The BSP would widen its interest rate corridor by the third quarter of 2017, when inflation is expected to accelerate, ANZ Research noted.
Bank lending grew by 17.9 percent in January, supported by loans for production activities and household consumption. It grew by 17.3 percent in December.
Including reverse repurchase placements (RRPs) with the central bank, lending grew slightly to 16.2 percent in January compared with 16.1 percent the previous month.
Seasonally-adjusted month-on-month, commercial bank lending increased by 1.8 percent for loans net of RRPs and by 1.6 percent for loans that include RRPs.
Lending for production activities, which comprised 89.2 percent of the aggregate loan portfolio, grew by 17.5 percent from the revised 16.9 percent in December.
This was driven primarily by real estate activities, which accounted for 18.7 percent, followed by wholesale and retail trade, and repair of motor vehicles and motorcycles (20.6 percent); financial and insurance activities (25.1 percent); electricity, gas, steam and air-conditioning supply (15.8 percent); manufacturing (8.5 percent).
“Bank lending to other sectors also increased during the month except in the case of public administration and defense, compulsory social security (-8.2 percent); and mining and quarrying (-3.3 percent),” the central bank said.
Loans for household consumption grew by 23.7 percent, up from 23.4 percent in December, “due to the expansion in credit card loans as well as sustained growth in motor vehicle loans and salary-based general-purpose loans, offsetting the decline in other types of household loans.”
IHS Markit senior economist Rajiv Biswas said the widespread upturn in bank lending, with loans for production activities rising by 17.5 percent, indicates the continued strong momentum in the underlying economy.
“Strong growth in consumption-related lending of 23.7 percent also highlighted the strength of consumer confidence, boosted by rapid economic growth and resilient inflows of remittances from workers abroad,” he said.
On a more cautionary tone, the economist said the buoyant growth in consumer lending highlights the need for continued close central bank surveillance of banking sector loan exposures for household consumer debt to ensure that household leverage ratios do not become a source of macroeconomic vulnerability in a scenario of rising inflation and interest rates.
The BSP said it will continue to ensure that the expansion in domestic credit and liquidity conditions proceeds in line with overall economic growth while remaining consistent with the BSP’s price and financial stability objectives.
Earlier, Fitch Ratings said credit demand in the Philippines should stay upbeat but pointed out a greater demand on operating frameworks as banks expand.
“Overheating and over-investment will remain a risk amid persistent high loan growth, particularly since real-estate activity has been a significant source of credit growth over the last five years,” it said.
The ongoing moderation in the residential property market, particularly in densely populated Metro Manila, is seen helping curb unrestrained growth in the sector.
“The slowdown may hurt smaller, more concentrated developers, while we understand that larger, more diversified players would be able to shift their activities to areas with stronger demand,” Fitch said.