By Joann Santiago
MANILA, March 4 (PNA) — Is the Philippine economy over-heating?
This is a constant question now given the rising inflation rate and the higher-than-usual growth of domestic liquidity or M3.
The Bangko Sentral ng Pilipinas (BSP) recently reported the 38.6 percent M3 growth last January from month-ago’s 32.7 percent
Relatively, rate of price increases during the same month rose to its 25-month low of 4.2 percent from the previous month’s 4.1 percent driven by the faster inflation rate in food and non-alcoholic beverages indices, partly due to the recent calamities.
Over-heating of an economy transpires when its capacity is not able to meet the rising demand and is shown through several instances such as uncontrollable rise in inflation because of above-trend growth of the domestic economy.
The Philippine economy’s trend growth is now between five to seven percent, higher than the four to percent percent trend growth a few years back.
In 2013, domestic output stood at 7.2 percent, higher than the six to seven percent target of the government.
The domestic economy has been posting above six percent growth since the third quarter of 2012.
And because of the continued firming up of the economy, some sectors said there is a need to worry about over-heating as signs of overheating creep up.
However, BSP Assistant Governor Ma. Cyd Tuano-Amador said fear of over-heating due to the unusual rise of M3 is not enough pointing out that this remains partly driven by adjustments of the rules of the central bank’s special deposit account (SDA).
These measures include baring foreign funds from tapping the facility, a cut in the SDA rates and disallowing investment management accounts (IMA) from parking fund in the SDA.
IMA funds are money from retail investors pooled through a bank’s trust department.
Deposits in the SDA facility peaked at P1.98 trillion in April 2013 but went down after monetary officials banned foreign funds from parking in the facility to remove speculative flows.
Another regulatory change for the SDA facility is the cut in its interest rate by at least 150 basis points.
Previously, interest rate of the facility was pegged against the RRP rate but since January 2013 it was cut to about two percent.
Monetary officials also decided that by end-July 2013, IMA deposits should be reduced by 30 percent based on the end-March 2013 level and fully withdrawn by end-November 2013.
M3 growth continue to rise as a result of the exit of IMA deposits and Amador said M3 growth last January is still partly due to this factor.
Another factor she cited for the rise in the volume of money supply in the economy is the growth in bank lending.
Amador said 90 percent of proceeds of loans extended by banks are used by the production sector, which she pointed out provides a big multiplier effect.
Central bank data shows that bank lending last January grew by 17.1 percent from month-ago’s 16.4 percent for loans excluding those extended by the BSP to banks through its reverse repurchase (RRP) facility.
Including RRPs, bank lending rise by 15.9 percent from last December’s 16.3 percent.
Loans for the productive sector in the first month this year rose by 16.2 percent from 15.3 percent last December while those extended to household went up at a slower pace of 8.9 percent from 8.3 percent a month ago.
Amador said monetary officials remain on the look-out on developments on bank lending since this might need proper action on monetary policies if expansion becomes too excessive.
She, on the other hand, maintained that current growth rate of the economy, bank lending and M3 are in line with the robust expansion of the domestic economy.
“The current growth trends are reflecting the dynamism of the economy,” she said as she hopes the continuation of this trend.
”What you want is sustained and durable growth and if reform, particularly purposeful reforms, continue then you should expect that this growth rate should not lead to overheating pressures or to inflationary pressures,” she added. (PNA)