OFW, hot money inflows fuel surge in liquidity
Domestic liquidity, a broad measure of money supply and deposit levels in banks, continued to surge in February, fueled by the steady inflow of remittances from overseas Filipino workers (OFWs) and foreign portfolio investments.
The Bangko Sentral ng Pilipinas (BSP) reported that domestic liquidity, also known as M3, grew 22.4 percent in February, only marginally slower than the 22.8 percent growth rate recorded in January.
BSP Governor Amando M. Tetangco Jr. said the growth in February reflected the steady rise in net foreign assets despite the slight slowdown in the expansion of net domestic assets.
"Overseas Filipino workers’ remittances, export earnings as well as foreign direct and portfolio investments continued to drive the sustained growth in foreign assets," Tetangco said.
The surge in foreign exchange inflows - which ultimately translates into more pesos circulating in the local financial system - means that the total amount of money in the system is on a sustained expansion track.
According to the BSP, the growth in credit to both the public and private sectors also contributed to the expansion of domestic liquidity since banks were releasing more funds into the system to their borrowers who, in turn, would spend them.
Tetangco noted that there was a slight slowdown in credit to the public sector from 20.3 percent to 13 percent as well as the private sector whose borrowing slowed down to 4.1 percent from 6.2 percent.
Nevertheless, Tetangco said the BSP was closely monitoring the growth in domestic liquidity which has since become one of the main concerns of monetary authorities despite the apparent resilience of the country’s inflation rate.
Even at this level of expansion, however, Tetangco said the BSP did not consider the domestic money supply as "excessive".
Tetangco has already brushed aside speculations that the BSP was gearing up to undertake non-policy related "tools" to mop up liquidity including the possibility of issuing its own bonds.
"Under our charter, we are allowed to do that under extraordinary circumstances," he said.
According to Tetangco, however, he does not consider the current money supply as excessive or the current conditions "extraordinary".
He said the central bank is already making sure it has ample room for any policy response that would be needed should money supply start affecting its inflation target.
"We want to make sure that the benign inflation environment is maintained over the policy horizon," he said.
Tetangco maintained that the economy has the capacity to absorb the dramatic increase in the demand for money without creating inflation pressures.
Tetangco downplayed the surge, saying that even at this rate, the domestic economy still has the capacity to absorb the liquidity without necessarily triggering a corresponding increase in inflation rate.
"That’s still absorbable," Tetangco said. "There is brisk activity in housing development and real estate in general as well as agriculture," he added.
The BSP has projected the demand for money to grow by an average rate of 14 percent for 2005 and 2006 but Tetangco said the dynamics of the country’s domestic economy is changing faster than expected.
"The sectors that use up liquidity are now bigger than before so they have a bigger absorptive capacity," Tetangco said.
"Even at this level, we see no threat to our inflation target but that doesn’t mean we are not watching it.
We are always watching it."
The Bangko Sentral ng Pilipinas (BSP) reported that domestic liquidity, also known as M3, grew 22.4 percent in February, only marginally slower than the 22.8 percent growth rate recorded in January.
BSP Governor Amando M. Tetangco Jr. said the growth in February reflected the steady rise in net foreign assets despite the slight slowdown in the expansion of net domestic assets.
"Overseas Filipino workers’ remittances, export earnings as well as foreign direct and portfolio investments continued to drive the sustained growth in foreign assets," Tetangco said.
The surge in foreign exchange inflows - which ultimately translates into more pesos circulating in the local financial system - means that the total amount of money in the system is on a sustained expansion track.
According to the BSP, the growth in credit to both the public and private sectors also contributed to the expansion of domestic liquidity since banks were releasing more funds into the system to their borrowers who, in turn, would spend them.
Tetangco noted that there was a slight slowdown in credit to the public sector from 20.3 percent to 13 percent as well as the private sector whose borrowing slowed down to 4.1 percent from 6.2 percent.
Nevertheless, Tetangco said the BSP was closely monitoring the growth in domestic liquidity which has since become one of the main concerns of monetary authorities despite the apparent resilience of the country’s inflation rate.
Even at this level of expansion, however, Tetangco said the BSP did not consider the domestic money supply as "excessive".
Tetangco has already brushed aside speculations that the BSP was gearing up to undertake non-policy related "tools" to mop up liquidity including the possibility of issuing its own bonds.
"Under our charter, we are allowed to do that under extraordinary circumstances," he said.
According to Tetangco, however, he does not consider the current money supply as excessive or the current conditions "extraordinary".
He said the central bank is already making sure it has ample room for any policy response that would be needed should money supply start affecting its inflation target.
"We want to make sure that the benign inflation environment is maintained over the policy horizon," he said.
Tetangco maintained that the economy has the capacity to absorb the dramatic increase in the demand for money without creating inflation pressures.
Tetangco downplayed the surge, saying that even at this rate, the domestic economy still has the capacity to absorb the liquidity without necessarily triggering a corresponding increase in inflation rate.
"That’s still absorbable," Tetangco said. "There is brisk activity in housing development and real estate in general as well as agriculture," he added.
The BSP has projected the demand for money to grow by an average rate of 14 percent for 2005 and 2006 but Tetangco said the dynamics of the country’s domestic economy is changing faster than expected.
"The sectors that use up liquidity are now bigger than before so they have a bigger absorptive capacity," Tetangco said.
"Even at this level, we see no threat to our inflation target but that doesn’t mean we are not watching it.
We are always watching it."
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