No asset bubble – banker

MANILA, Philippines - The unprecedented expansion of money supply or M3 will not result in an asset bubble, similar to 2007-2008 period.

According to the Australia and New Zealand Banking Group Ltd. (ANZ), the huge increase in money supply is far from creating an asset bubble or higher inflation.

“We now no longer see the recent jump in money supply as an inflationary shock in itself as it is driven by technical changes in the central bank’s liquidity operations,” Eugenia Fabon Victorino, ANZ analyst for Asia and Pacific, said in a recent report.

“We expect M3 growth to normalize over the next few months, likely peaking in November and December,” Victorino added.

The money supply growth is related to changes in regulations in the Bangko Sentral ng Pilipinas’ (BSP) special deposit accounts (SDAs), leading to an increase in deposits, which now appear in M3.

M3 money supply expanded 31 percent to P6.203 trillion in September, 30.9 percent in August, and  30.1 percent in July.

Net foreign assets (NFA), including remittances, export earnings and foreign investments, fueled high inflation in 2008. The general global commodity surge, impacting oil prices, as well as adverse weather conditions impacting domestic food prices, also contributed to the inflationary situation.

As a pre-emptive move, the BSP widened access to its SDA. According to the BSP, the SDA has the primary purpose of managing excess domestic liquidity in the financial system.

The regulatory change enabled trust departments of banks and non-bank financial institutions to access the facility for the first time in May 2007, at a rate that was initially marginally higher than the overnight policy rate. This allowed the central bank to mop up the excess liquidity from the system’s M3 money supply and have sufficient monetary tools to manage the prospect of continued strong inflows.

The ANZ further explained that the expanded access to the SDA in 2007 brought down the growth in M3 to 4.8 percent within seven months, the slowest rate in three years.

In July 2012, the BSP prohibited access to the facility by funds obtained directly or indirectly from non-residents, including the re-investment of maturing funds held by non-residents.

“Thus, growth in M3 has been domestically driven over the past 12 months.

The reduced levels of liabilities excluded from money supply and SDA drove the latest jump in M3 growth. The decrease in liabilities excluded from money supply has also contributed to the rise in M3 as the national government and other depository corporations paid off bills in recent months,” Victorino said in the report.

However, the National Government’s current strong revenue collection is expected to boost deposits to the central bank, thereby increasing liabilities once again over the next several months.

Meanwhile, the recent regulatory changes on the SDA have led to its decline from a peak of P1.916 trillion (approximately $47.1 billion) in February to the current P1.554 trillion.