Liquidity improves on RRR cuts, catch-up infra spending

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said liquidity in the financial system has already improved as the government plays catch-up with its infrastructure projects and with the reduction in the level of deposits banks are required to keep with the central bank.

Dennis Lapid, officer-in-charge of the BSP’s Monetary Policy Sub-Sector (MPSS), said liquidity conditions are expected to further improve going forward as the government ramps up infrastructure spending and after the decision of the Monetary Board to slash the reserve requirement ratio (RRR) for banks.

“Liquidity conditions are expected to improve going forward as the liquidity gets released into the system both by the reserve requirement and also by the increase spending by the national government,” Lapid said.

Latest data showed money supply or M3 growth eased further to 6.4 percent in May from seven percent in April.

The amount of money circulating in the financial system reached P11.74 trillion in end-May, P700 billion higher than the P11.04 trillion recorded in end-May last year.

“The M3 number in May still does not incorporate the impact of the RRR adjustment. National government was unable to undertake new projects and much of the liquidity was locked away in the treasury single account in the BSP,” he said.

The national government was forced to operate on a reenacted budget due to the delayed passage of the 2019 national budget that was only signed by President Duterte on April 15.

“That liquidity is expected to be slowly released as the line agencies start to spend on their projects,” Lapid said.

The Duterte administration has committed to spend over P9 trillion until 2022 for 75 major infrastructure projects under the Build Build Build program.

Latest data from the central bank showed demand for credit eased slightly but remained the principal driver of money supply growth. Credit growth eased to 10.4 percent in May from 12.7 percent in April.

Loan disbursements reached P8.28 trillion in end-May from P7.5 trillion in end May last year with loans for production activities cornering a share of 88.2 percent.

BSP Deputy Governor Francisco Dakila said the bulk of the liquidity in the financial system goes to production activities.

“It means that economic activity is by no means starve of liquidity,” Dakila said.