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Liquidity growth slows amid sluggish bank lending

liquidity growth slows amid sluggish bank lending - Liquidity growth slows amid sluggish bank lending

MONEY SUPPLY growth continued to ease in September as bank lending slowed to a 13-year low, with lenders turning cautious in granting credit amid the coronavirus pandemic, which has plunged the economy into recession.

M3, which is considered as the broadest measure of liquidity in an economy, grew by 12.3% in September, easing from the downward-revised 13.7% pace logged the previous month, preliminary data from the Bangko Sentral ng Pilipinas (BSP) released on Tuesday showed. Liquidity growth has slowed for four consecutive months since June’s 14.9%.

The central bank said demand for credit boosted money supply growth in September.

Domestic claims rose 8.2% in September, slowing from the 10% expansion in August.

Net claims on the central government grew 45.7%, also easing from the 50% seen in the prior month, due to the government’s lower funding requirements in September.

Meanwhile, claims on the private sector, driven mainly by lending to firms and households, inched up by 1.4% in September, slowing from the 3.6% expansion in the prior month, dragged by “constrained economic activity and weak corporate sector performance,” the BSP said.

On the other hand, net foreign assets in peso terms grew by a faster pace of 20.6% from 18% the previous month, reflecting the continued buildup of the country’s gross international reserves that stood at $98.95 billion at end-August.

“Similarly, the growth in the NFA of banks accelerated, as banks’ foreign liabilities declined on account of lower bills and bonds payables,” the BSP said.

BANK LENDING GROWTH AT 13-YEAR LOW
Meanwhile, bank lending eased to hit a 13-year trough in September as financial firms were more conservative, tightening their credit standards amid the pandemic.

BSP data released separately showed outstanding loans extended by universal and commercial banks climbed by 2.8% in September, easing from the 4.7% growth in August and marking the slowest pace since the 2.4% seen in June 2007.

Inclusive of reverse repurchase agreements, bank lending growth slowed to 2.9% from the 5.6% logged the previous month.

“The general decline in bank growth partly reflects banks’ reduced tolerance for risk, decline in loan demand due, in turn, to weak business and income prospects and observed shift by non-financial corporates to alternative sources of funds,” the central bank said.

Loans for production activities, which made up 87.1% of total lending that month, rose by 2.4%, slowing from the 4.1% pace in August.

The BSP said loans disbursed to key sectors continued to contract, particularly in manufacturing (-2.6%) and wholesale and retail trade and repair of motor vehicles and motorcycles (-3.4%).

On the other hand, the following sectors contributed to the overall growth in production loans: human health and social work activities (44.5%); information and communication (9.7%); transportation and storage (8.4%); real estate (7.3%); and electricity, gas, steam, and air- conditioning supply (3%).

Meanwhile, bank lending to households rose by 10.2%, down from the 12.9% growth logged the previous month, due to a slowdown in credit card and auto loans, the BSP said.

“Going forward, the BSP remains prepared to calibrate its monetary instruments as needed to ensure adequate domestic liquidity and credit in support of economic activity amid the COVID-19 pandemic,” the central bank said.

“The BSP emphasizes that its accommodative monetary policy stance, together with the National Government’s ongoing health and fiscal initiatives, remains crucial in supporting market sentiment and credit activity. Looking ahead, the BSP reassures the public of its commitment to deploy its full range of instruments as necessary to ensure that domestic liquidity and credit remain adequate amid significant economic disruptions due to the ongoing health crisis,” it added. 

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said banks are being cautious in lending despite regulatory relief and stimulus measures from the BSP as the pandemic continues to cloud the country’s economic outlook.

“Banks will be working doubly hard to sift through and gauge creditworthiness given the very plausible risk factors in these times while households and firms put off aggressive expansion plans until the outlook improves,” Mr. Mapa said in an e-mail.

“The deceleration in bank lending reflects the current trends reported in the [third-quarter] gross domestic product figures with capital formation cratering as both firms and corporates hold back big-ticket investments to wait out the storm,” he added. “It looks as if for now, with the economic recovery uncertain, bank lending and overall investment activity will be on ice, no matter what BSP brings out of its proverbial deep toolkit.”

The central bank has slashed rates by a total of 175 basis points (bps) this year, bringing down rates on the overnight reverse repurchase, lending, and deposit facilities to record lows of 2.25%, 2.75%, and 1.75%, respectively.

It also slashed the reserve requirement ratio (RRR) of big banks by 200 bps to 12%, while the RRR of thrift and rural banks was cut by 100 bps to three percent and two percent, respectively.

Philippine gross domestic product (GDP) shrank by 11.5% year on year in the July to September period, marking its third consecutive quarter of contraction.

Year to date, GDP contracted by 10%. The government expects the economy to shrink between 4.5%-6.6% this year. — L.W.T. Noble

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