Data from the Bangko Sentral ng Pilipinas (BSP) showed that the expansion in domestic liquidity was traced to the increase in the foreign exchange position of banks and the decline in the BSP’s net foreign liabilities.
Deposit money banks reported a 19.5 percent expansion in their net foreign assets, outpacing the growth in net foreign liabilities of 11.16 percent.
BSP officer-in-charge Alberto V. Reyes reported yesterday that net domestic credit to both the private and public sectors continued to grow, led by the 8.5 percent growth in credits to the public sector.
"Similarly, credits to the private sector showed an improvement with the continued increase in bank lending which grew at a moderate pace of four percent year-on-year," Reyes said.
The growth in M3 was traced to the expansion in the net foreign assets (NFA) of the monetary system and the improvement in net domestic credits to both the private and public sectors.
For the last couple of years, government borrowing has been fueling the growth in domestic liquidity and it is expected to be the main factor for the succeeding years as the Department of Finance (DOF) laid out its borrowing program that would rely heavily on the domestic sale of government securities.
The lack of corporate demand for credit gave ample room for the government to tap the local credit market but it also meant that there was no improvement in economic activity that would have translated into actual growth in domestic production.
In the months ahead, the BSP said monetary authorities would continue to monitor developments in the real and monetary sectors to ensure that liquidity conditions remain consistent with price stability objective conducive to sustainable economic growth.
Government has been forced to borrow from foreign and domestic credit sources in order to fund its deficit this year and in 2005, this strategy would remain as the Arroyo administration planned to borrow 75 percent of its funding requirement from the domestic credit market.