Two years of global crisis: Bulgarian economy in 2009 - Industry Watch www.iwatchbulgaria.com
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Two years of global crisis:
Bulgarian economy in 2009
Industry Watch
www.iwatchbulgaria.com
Sofia, 1 September 2009 г.Table of contents Origins of the global crisis and fundamentals of the Bulgarian economy ................................3 Economic activity in CEE .........................................................................................................5 External debt and access to global credit markets ..................................................................7 Capital inflows........................................................................................................................9 Exports and industrial production.........................................................................................10 Labor market developments.................................................................................................11 Contraction of GDP...............................................................................................................12 Changes in the prices of investment assets...........................................................................13 Stock price dynamics ........................................................................................................13 Housing price dynamics ....................................................................................................14 Development of the banking sector......................................................................................15 Household deposits ..........................................................................................................15 Bank loans ........................................................................................................................16 Fiscal policies and sovereign risk...........................................................................................17 Threats and opportunities ....................................................................................................18
Origins of the global crisis and fundamentals of the Bulgarian economy
Our view of the crisis is that it is an inevitable process of correction that followed the
malinvestments caused by the loose monetary policy of the Federal Reserve and partly – of
the European Central Bank – in the years since 2000. The materialization of the misallocation
of resources was the increase in private and public debt and the related financing of long-
term investment projects that would be otherwise (i.e. in an environment of tight monetary
policy, or hard money) impossible. In turn, this lead to a sizable asset-price inflation,
including a fast growth in real estate prices.
The global market began a healing process in 2007 which included a slow-down of
investment activity and contraction of new lending, in desperate attempt of the private
sector to de-leverage. The process is however painful because the mistakes of the past need
to be corrected (i.e. paid for) and resources – capital, labor, technology – should be
reallocated towards activities that correspond to the new market environment of depleted
savings and capital.
The start of the crisis in 2007 coincided with a period of rapid economic growth in Bulgaria,
driven by investment expansion. It is hard to distinguish to what extent the dynamics of the
Bulgarian economy was driven by fundamental factors, related to increased productivity and
improved business environment, and to what extent it resulted from rapid credit expansion.
However, we can outline several indicators that growth was not solely due to “easy money”
and that Bulgaria faced the onset of the of the crisis in a considerably better position than
most of the EU economies (and the US):
- The government followed a long-term policy of fiscal surpluses, i.e. the government
in fact reduced the money supply by sterilizing the fiscal reserve;
- The government accumulated a fiscal reserve almost equal to the total amount of the
public debt; as a result the net public debt of Bulgaria is virtually none, unlike many
other emerging economies in the region that had loose fiscal policies;
- The Currency Board arrangement prohibits any actions of the Central Bank to
increase credit thus creating credit bubbles; to the contrary, since 2004-2005 the
Central Bank continuously made attempts to restrict private banks credit expansion;
- The banking sector has no access to Central Bank refinancing by law while regulations
of risk-taking, capital reserves and liquidity ratios were relatively conservative; not a
single bank was reported to have had liquidity troubles, on the contrary – domestic
banks have much stronger capital cushions that most banks in the US and UK for
instance;- The level of private indebtedness before the start of the credit expansion was
extremely low; even by the end of 2008 the level of household mortgage debt as a
share of GDP is at least 3 times lower that the average for the Euro area;
- A series of income tax cuts improved the investment climate and part of the
investment decisions to shift activities to Bulgaria are due to these measures;
- In recent years a large number of people entered the labor market as a result of
structural reforms in the last decade; the employment rate was quite low compared
to EU average levels which represented a high potential for increase in employment;
The pattern of impact that the global crises has on the Bulgarian economy is closely and
logically related to two important and distinct characteristics of the country:
- High dependence on foreign trade: export and import of goods and services totaled
144% of GDP in 2008;
- Dependence on capital inflows; despite the relatively high level of domestic savings,
the process of decapitalization of the economy prior to the structural reforms that
started in 1997 explains the long-term need for foreign capital to finance domestic
investment.
Chart 1: Savings and investment, in % of GDP
Source: BNB, NSI
Here is a brief overview of how the crisis affected the Bulgarian economy in time:
- A short drop of investment asset prices after speculative players left Eastern Europe
in 2007; this had a relatively mild impact due to the underdeveloped capital market;
- A contraction of demand for real estate by foreign buyers due to the sharp
contraction of lending and the respective global slow-down of real estate markets;
this affected mostly construction and related activities which specialized in vacation
(second-home) properties and to some extent, commercial properties;- A sharp decline in global demand (and immediately – of prices) for major
commodities including energy sources, since mid-2008; this affected mostly export-
oriented heavy industries;
- Contraction of new lending by the banking sector since October 2008 which lead to a
sharp decline in housing demand by local residents; an additional decline in
construction and related industries followed;
- Contraction of investment lending, as well as foreign direct investment inflows, as a
result of the perceived increased country- and regional risk since end-2008; as a
result gross capital formation in the economy fell by 14% for the first half of 2009
compared to the same period of 2008;
- Overall decline of private consumption in search of financial viability due to expected
recession in 2009.
Economic activity in CEE
Most of the new EU member states have seen steady deceleration of economic activity since
the firs half of 2008. The economic downturn is a result mainly to the weakening external
demand (almost all of these countries are heavily relayed on the export), declining private
consumption, drying up of capital inflows and retrenchment of credit resources available.
The most severe collapse of GDP is seen in countries exposed to additional vulnerabilities
stemming from the high level of external debt and huge current account deficit.
The current economic developments in CEE countries have shown that the exchange rate
regime and availability of different monetary instruments do not seem to have much of an
impact in the current situation of global demand collapse. Sharp GDP fall has been registered
in countries with pegged exchange rates (Lithuania, Latvia, Estonia), as well as in countries
with floating rates where the local currencies have experienced major depreciation
(Romania, Hungary).
Within the group of new member state Bulgaria is among the economies with comparatively
modest GDP contraction. For the time being the best performing economy is Poland, being a
huge market with strong internal demand and less dependent on export.
Graph 2: GDP Dynamics (% change, y/y)Source: Eurostat Graph 3: Industrial Production Dynamics (% change, y/y) Source: Eurostat
External debt and access to global credit markets The gross external debt as of May 2009 reached EUR 36.6 billion, or about 108% of expected GDP for 2009. Since end-2008 government debt and banking sector debt declined, while the real sector debt (including intra-company loans) increased. The total external debt outstanding increased by 60% since mid-2007; about EUR 13.7 billion of new lending became available to the domestic borrowers. Until November 2008 the debt grew; after that till March 2009 repayments exceeded new credit, i.e. we saw an outflow of capital. In April 2009 this process ended and total credit outstanding began slightly to grow again. In a capital-poor economy like the Bulgarian one, the net inflow of foreign savings is directly correlated to economic growth. The impact of the global crisis is manifested by a sharp reduction of the access to foreign credit. New lending to the real sector began to decrease in the end of 2007, while commercial banks were able to attract new credit until the end of Q2 of 2008. For the first five months of 2009 the decline in new lending was 60% (or about EUR 3 billion), compared to the same period of 2008. The real sector received EUR 1.2 billion between January and May 2009; the respective 2008 amount was EUR 3.2 billion. This process coincides with a sharp contraction of domestic bank lending, posing a serious threat in front of companies that rely on a constant refinancing. On a macro level, the decline in external credit (combined with decreased FDIs) delays the process of productivity improvements and income convergence to the richer economies of the common market. At the same time data shows that the structure of foreign debt at present is more favorable (and less risky for macroeconomic fundamentals) than in the time that the crisis started to unravel. The share of public debt is negligible (about 7.8%), and twice as low as in mid-2007. Loans to the business sector remained at 36%. The share of banking sector loans and intra- company loans slightly increased. About 65% of the total amount of the foreign debt bears the characteristics of a direct (equity) investment; therefore creditors are unlikely to take harsh measures to foreclose on their daughter-companies and branches. The debt burden is a particular trouble for those companies who financed long-term projects with short-term loans. When credit contracts, refinancing of old debt is difficult and therefore some “fire-sales” of assets might be expected. From a macroeconomic point of view, the contraction of new external lending means a lower level of domestic investment which in turn will lead to a contraction (or lower growth) of GDP.
Graph 4: Inflow of new external credit by beneficiary Source: BNB Graph 5: Structure of external debt Source: BNB
Capital inflows The contraction of the world money supply led to substantial deceleration of the inflows of foreign capital into the country. Foreign direct investment declined to 17% of GDP in mid- 2009 from 29% as of end-2007. In the same time, the current account deficit started shrinking – from almost 27% of GDP as of June 2008 to 23% of GDP in mid-2009. As a result, now FDI cover 70% of the registered current account deficit, as this ratio is gradually stabilizing. The decrease of official currency reserves in the recent months was combined with contraction of imports. Thus, as of June 2009 the coverage of the monthly imports with currency reserves expanded to 6 months. There is a stronger dependence between the inflow of foreign direct investment and the imports of investments goods in comparison with the imports of consumer goods. The inflow of foreign capital “explains” 80% of the changes in the imports of investment goods and 66% of the dynamics of the consumer goods’ imports in the period 2001 – 2009. In both cases the established relation between the inflow of capital and imports is of statistical significance. The net inflow of currency from travel increased in recent months, i.e. Bulgarians cut their expenditure on traveling abroad more considerably than foreigners, visiting Bulgaria. Meanwhile, the inflow of emigrants’ cash, measured via the sum of current transfers and labor income from abroad, decelerated substantially. Job opportunities in the preferred by Bulgarians destinations diminished in recent moths. Unemployment increased in Germany, Ireland, Spain, the United Kingdom, and the United States, even if measured via seasonally adjusted data. Although there are signals that some countries are coming out of the recession, the employment will begin to pick up with a certain time lag. Therefore, the inflow of currency in the form of emigrants’ cash will continue to decline in the months to come. Chart 6: Capital inflows
FDI to CA deficit Months of imports
250.0 7.0
6.0
200.0
months of imports
5.0
150.0
4.0
%
3.0
100.0
2.0
50.0
1.0
0.0 0.0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
Source: Industry Watch based on data from BNB
Exports and industrial production
The official statistics showed a decline of some 20% in the volume of industrial production in
Bulgaria in the 12 months before mid-2009. Similar in size is the contraction of imports – by
16% for the 12 months before June 2009. Large part of the expansion of industrial
production in recent years was due to increase in the demand for products for intermediate
consumption and investment goods on a local and global level. In line with this, in Bulgaria
and worldwide we observed a process of considerable expansion of inventories, reflecting
the static expectations of rapid and even exponential growth.
The increasing influence of global factors in the context of the integration of Bulgaria in the
single European economy resulted in transferring the outside effects on the local economy,
although with a certain time lag. The first tangible signals for the decrease of production
activity in the country after the considerable growth of industrial output in 2007 and 2007
were felt in the third quarter of 2008. In September 2008 the decline of producer prices
started, which together with the contraction of sales in real terms, led to a drop in the
turnover of the industry. In the second quarter of 2009 industrial output stabilized around
the levels, typical for 2005.
The contraction of production is not equally distributed between the economic sectors.
More tangible is the decline of mining and quarrying (by more than 32% compared to a year
ago) and weaker the contraction of production in the processing industry – by 22%. Lightly
affected are sectors, producing goods, whose demand is of relatively low elasticity. This
confirms the thesis that the contraction of industrial production is due mainly to crisis of
investment demand.
Official balance of payments’ data reveals a positive growth of the exports of food, tobacco
and pharmaceutical products and contraction of the exports of raw materials and
investments goods. Since of the onset of the global financial crisis a slow change in thestructure of the Bulgarian export has begun – the share of consumer goods increased at the
expense of raw materials, which are used for intermediate consumption in the production
process.
Chart 7: Structure of exports
Other energy Oil products
products 12%
3%
Metals
15%
Other consumer
goods (different
from clothing and
footwear)
15% Investment goods
17%
Other raw
materials
(different from
metal) Clothing and
28% footwear
10%
Source: Industry Watch based on data from BNB
Labor market developments
For Bulgaria’s labor market the recession started not before September 2008 - the month
when official unemployment was historically lowest. The number of registered unemployed
rose by over 55,000 from September 2008 till June 2009, which is now 7.3% of the labor
force in the country. Labor force increased insignificantly for the same period, that is, the
basis for unemployment measurement stayed in fact unchanged and the share of
unemployed rose by 1.5 percent for the period.
It is likely that a vast share of those who recently lost their job turned to free-lancing or
offering labor without any labor contract. The number of jobs under labor contract shrank by
93,000 being substantially more than the number of new unemployed. Though there is no
official data yet from the regular labor surveys of households in Q2 2009, employment has
probably shrank by some 50,000 since the beginning of the crisis.
Destruction of jobs under labor contract was concentrated in few industries. Over 60% of the
destroyed jobs, or over 56,000 in number, have been in the manufacturing. The rest have
been in construction and retail. Almost 100% of the lay-offs were in the private sector, which
shrank for the past 12 months by over 100,000 jobs under labor contract.
Labor demand cooling, combined with general price fall, must lead to nominal fall in wages.
However latest official figures does not confirm that hypothesis. Despite excess of labor
supply over demand, statistics registered average wage rising by 14% for a year, in
construction alone the rise being double that figure. That probably shows a slight decreaseof unregistered incomes, after introducing lower tax-insurance burden in the beginning of
2009. More likely however the official statistics have not captured the actual decline of
wages in some industries.
It might well be the case that lay-offs are concentrated in the segments where productivity is
lower than the average. Thus average wages, purely statistically, look as if they increase. But
such data might make little sense for both supply and demand side on labor market. More
importantly, the newly freed labor resource is primarily in the segment of basic (unqualified)
and middle skill-set labor. That must be labor force which fairly easy can change industries in
a period, when some industries have been contracting.
Table 1: Unemployment rate in Bulgaria
June 2009 September 2008 change
June/September
number of unemployed 270,136 214,692 55,444
% unemployment 7.29 5.8 1.49
Source: Employment Agency
Table 2: Employment by sectors
June 2009 September 2008 change
June/September
number of jobs under labor 2,402,243 2,495,119 -92,876
contract
of those in private sector 1,770,751 1,863,747 -92,996
number of jobs by industry:
manufacturing 553,296 609,408 -56,112
construction 189,155 210,153 -20,998
retail 435,734 448,341 -12,607
Source: NSI.
Table 3: Average wage by sectors
wages by industry (BGN per June 2009 September 2008 change September=100
month):
manufacturing 521 486 107.2
construction 563 451 124.8
retail 456 391 116.6
average for the economy 587 538 109.1
Source: NSI.
Contraction of GDP
The Bulgarian economy contracted in real terms in the first two quarters of 2009 (at 3.5%
and 4.8% annually), as measured through GDP. The contraction of the volume of the
economy coincided with the moderation of inflation and thus, for the first time after theintroduction of the currency board in Bulgaria GDP declined in nominal terms on a quarterly
basis.
From the perspective of aggregate demand, the biggest decline is seen with industry, but the
pace of deceleration is slowing down, at least compared to the previous quarter. Agriculture,
which is 5% of GDP, also had negative contribution to the realized growth, whereas services
(almost 54% of the economy) grew in real terms. Partially reflecting the peculiarities of the
political business cycle in the context of the forthcoming at the time parliament elections,
collective consumption surged by 11% in real terms, thus mitigating the decline of end-use
consumption.
Investments in fixed capital shrank by 13.9% in real terms. Hence, the share of fixed capital
formation in GDP declined from 37% in Q4 2008 to 29% in mid-2009. Since Q2 2008 there
has been an ongoing process of shifting growth expectations, which led to cuts in the share
of inventories. Official data confirms the thesis that the current crisis is materializing mainly
through reduction of investment demand.
Chart 8: Real GDP growth and investments
Share of investments in GDP
Real GDP growth
40 8.0
35 6.0
30
4.0
25
% of GDP
2.0
%
20
0.0
15
-2.0
10
5 -4.0
0 -6.0
2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009
q1 q4 q3 q2 q1 q4 q3 q2 q1 q4 q3 q2 q1
Source: Industry Watch based on data from NSI
Changes in the prices of investment assets
Stock price dynamics
The local capital market contacted substantially, reflecting the outflow of foreign capital and
the withdrawal of speculative investors from emerging economies. In Bulgaria, however, the
decline was stronger compared to the Euro area and other mature economies – as of
February 2009 the shares of Bulgarian companies depreciated by 86% relative to the high
levels, reached in the fall of 2007.The partial recovery of stock prices in recent months is rather a function of the expansionary
monetary and fiscal policy on a global scale, than a substantial improvement in economic
fundamentals. The rise of stock prices is considerably higher in the Euro area compared to
Bulgaria, reflecting the weaker inflow of foreign capital in the country and the limited
opportunities of the local authorities to conduct monetary and fiscal policy in a state of
currency board and increasing probability of running a budget deficit. The contraction of the
non-bank financial sector and the outflow of household savings from local mutual and
voluntary pension funds additionally constrain the potential for generating demand for risky
financial instruments.
Chart 9: Dynamics of stock exchange indices
SOFIX Dow Jones Euro STOXX
350.0
300.0
250.0
2005=100
200.0
150.0
100.0
50.0
0.0
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: Industry Watch based on data from BSE-Sofia and ECB
Housing price dynamics
Housing prices reported nominal decline under the influence of cooling domestic and foreign
demand. The domestic demand for housing depends not only on income, but also on the
existence of credit constraints in the context of capability to obtain mortgage credit as a
main mechanism for financing the purchase of a house. The deceleration of housing credit
growth became more tangible after the onset of the global financial crisis in mid-2007 due to
the deterioration of the global environment, as well as domestic reasons, including the
gradual development of the credit market and the growth of banks’ credit portfolio (and the
initial base with it). The foreign demand for housing in the country, measured via the
dynamics of emigrants’ cash and foreign direct investment in real estate, continued to
decelerate, with the percentage declines being 20% and 50% respectively.
The comparison of official and forecasted prices shows that in the 12 moths before Q1 2008
housing prices have grown faster than the corresponding improvement in economic
fundamentals, i.e. there are reasons to believe that in this period housing was overvalued. In
result, a correction followed, initially leading to price growth deceleration, and after that tonominal price decline, exceeding 20% in mid-2009. Under the assumptions that as of end-
2009 the reported decline of GDP is 3% in nominal terms, housing credit growth decelerates
to 10% annually, the inflow of emigrants’ cash and foreign direct investments decreases by
30% and 50% annually, we could expect the housing price drop to reach 25% annually.
Chart 10: Housing price dynamics
Official prices Forecasted
170
150
130
previous year=100
110
90
70
50
2002 2004 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
2005 2005 2006 2006 2007 2007 2008 2008 2009 2009
Source: Industry Watch based on data from NSI
Development of the banking sector
Household deposits
The standard indicators (М2/М1 and household deposits/currency in circulation) show
increasing confidence of households in the stability of the banking system and the currency
board in general. The improved liquidity of deposit products, combined with the growing
yield in real terms, allowed for the process of transformation of cash balances into bank
deposits to continue despite the unfavorable impact of the global financial turmoil.
Chart 11: Indicators of confidence in the banking system380% Deposits to currency in circulation
М2/М1
330%
280%
230%
180%
130%
80%
30%
2000 2002 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 q1
2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
Source: Industry Watch based on data from BNB
The growth of household deposits decelerated substantially, but remained positive (9%
annually in June 2009), i.e. household bank savings continued to increase even in a state of
shrinking economy. Until November 2008 deposits denominated in foreign currency (mainly
euro) grew faster than savings in leva. In 2009 this trend was reversed, which reflects the
relatively high confidence of households in the stability of the local currency, as well as the
more favorable interest rate terms, which banks offered to attract resource in leva. The
ongoing growth of bank deposits is partially attributable to the increasing incentive to save.
The decline in inflation in combination with the growth in nominal yield allowed for
considerable increase in real interest rates on deposits, thus stimulating saving.
Bank loans
In the last two years corporate credit growth rate exceeded the growth of household loans.
Thus, the banking system was one of the main sources of capital for the business and
meanwhile an important factor for the achieved economic growth.
The credit expansion in Bulgaria reached its peak in December 2007 (for corporate credit)
and February 2008 (for household credit). A period of considerable deceleration of the
growth of bank loans followed. The slowdown of credit growth is more notable in the
consumer, rather than the housing segment.
The global crisis did not stop, and even on the contrary, accelerated one of the main trends
on the credit market in recent years – the increasing share of loans for the purchase of long-
term assets (mainly housing) at the expense of loans, financing mostly current consumption.
Despite the considerable credit expansion in recent years the level of indebtedness of
Bulgarian households remained almost threefold lower than the Euro area. The lack of
excessive indebtedness implies that the adaptation of Bulgarian households toward the
evolving global environment will be faster and less painful.Chart 12: Growth of bank loans by sectors
180 Household credit Non-financial corporations
170
160
previous year=100
150
140
130
120
110
100
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Source: Industry Watch based on data from BNB
Fiscal policies and sovereign risk
Since the introduction of the Currency Board in 1997 all governments managed to maintain a
prudent fiscal policy based on balanced (or surplus) state budgets, together with reduction
of tax rates and repayment of a heavy public debt accumulated before 1996. At the same
time part of the surpluses were set aside to form a sizable fiscal reserve which in mid-2009
was about 12-13% of GDP, or EUR 4.2 billion.
The low level of public debt together with the policy of budget surpluses protected Bulgaria
from significant external shocks that other emerging economies in the region suffered.
However, due to general elections the previous government spent a total of BGN 4 billion at
the end of 2008 which immediately lead to a decline in foreign reserves of the Central Bank.
Instead of stimulus for domestic production, the government induced a huge outflow of
domestic savings which financed imports. This single act created a strong negative
expectation in foreign observers and analysts. In this context, the hesitation to make bigger
cost cuts in the 2009 budget despite the strong trend of revenue decline due to economic
slow-down and commodity deflation, might be seen as a factor of concerns.
As of June 2009 (mid-year) the consolidated balance was still positive (BGN 183 million; BGN
3.8 billion for 2008). However, in July alone the deficit exceeded BGN 560 million, growing
for each month since May. The balance for the seven months of the year is a deficit of BGN
386 million. Despite these signals, the previous government kept its promise to increase
pensions, which additionally reduces the chances of costs cuts in the future.
Total revenues for January-July of 2009 are 10.3% lower than the level of 2008, while
expenditures grew by 23.8%. Such a discrepancy cannot be maintained if the governmentwants to avoid total loss of credibility. The major factor behind revenue decline is the high dependence on indirect taxes, which in turn shrank both due to real economic decline and falling prices of commodities and energy. At the same time, income taxes perform well. The challenge in the mid-term is to cut expenditures in nominal terms, probably to the 2007 levels. At present, the government expects a BGN 2.6 billion of potential deficit, should no measures are taken. To balance the budget, it plans to increase revenues through prevention of evasion and fraud by BGN 1.4 billion, and to cut expenditures by about BGN 1.2 billion. Our estimate is that the revenue improvement plan is too optimistic and therefore a higher restriction of costs will be required. Taking into account the structure of expenditures and the state of the public sector, the highest effect would have staff reductions, privatization, cancellation of large investment projects or their concession, as well as abolishment of subsidies to loss-making sectors. If the new government turns successful in balancing the 2009 and 2010 budgets we can assert with a high level of certainty that the risk of a major macroeconomic crisis will be avoided. The government has at its disposal a cushion of BGN 11 billion (fiscal reserve plus excess reserves of the Central Bank) to support the solvency of the banking sector in case of increase of non-performing loans and consequent losses. A balanced budget and a low public debt guarantee that the government will not “transfer” risk to the monetary system, in other words, we see no risk for the currency board and the stability of the exchange rate. Graph 13: Main fiscal indicators, % of GDP Source: Ministry of finance Threats and opportunities The main challenge before the local economy is the rebalancing of public finances in a state of contracting public revenues put in the context of the strong dependence of the budget on
indirect taxes. A potential budget deficit could initiate new lowering of the sovereign credit
rating, which would additionally raise the country risk premium. On one hand, this could
impede the access to foreign capital via the banking system. The more difficult access to
financial resource on the local and European interbank market will reflect in restricting the
long-term financing, and will thus affect households, non-financial enterprises and especially
big investment projects.
The major risks before the banking system are two main groups:
- risks, related to the additional restriction of the access of banks to foreign capital;
- risks, related to the further deterioration of the credit portfolio quality.
The first group of risks depends largely on the prudent fiscal policy, the avoidance of a
scenario with a large budget deficit and other actions, which could increase the overall risk
in the economy. Potential increase of the risk premium for the country could increase the
cost of access to financial resource on the interbank market. Not to mention that inetrbank
interest rates in Bulgaria surged in the last two years relative to the cost of financing on the
credit market in the Euro area. The spread between the 3 m. Sofibor and the 3 m. Euribor
expanded 13 times in the period June 2007 – March 2009. The debt financing from abroad
plays an important role for achieving the necessary balance in the maturity structure of
assets (short-term and long-term loans) and liabilities (domestic deposits and attracted
funds from non-residents).
Chart 14: Spread between the Sofibor and Euribor indices
6.00
onset of the financial
5.00 crisis
percentage points
4.00
3.00
2.00
1.00
-
2003 2004 2005 2006 2007 2008 2009
Source: Industry Watch based on data from BNB and ECB
The second group of risks before the banking system is related to the further deterioration
of the quality of the credit portfolio. 2 years after the onset of the global crisis total overdue
exposures are 6.63% the banking system’s gross assets. Loans overdue for more than 90
days are 4.27% of the credit portfolio, while the exposures classified as a “loss” (with
delinquency over 180 days) reached 2.59% of the bank loans.The share of overdue credit of non-financial enterprises increased twice - to 4% in mid-2009. Similar is the deterioration of the credit portfolio of households, whose overdue loans expanded their share to 5.6% from 2.8% two years ago. The distribution of bank loans by industries is not symmetrical – 21% of all corporate loans are in real estate operations and construction, 20% in the processing industry, 32% in trade and 7% in tourism. The disproportional contraction of the different economic sectors means that the dynamics of the delinquency rates will be largely determined by the distribution of credit by industries. An advantage of the Bulgarian economy is the low level of public debt and the low household indebtedness. Meanwhile, the internal potential for increasing productivity is not fully utilized. The risks of deterioration of the bank assets’ quality could be neutralized by the relatively high levels of capital adequacy of banks and, if necessary, by the sizable fiscal cushions that resulted from the several years of budget surpluses.
You can also read
