- Political stability
- Fiscal affairs
- Monetary policy
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Risks before the credit expansion
submited on 01.03.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 01.03.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
One of the key events of the past 2007, which will probably to a large extent determine the dynamics of the American (and partially the world) economy in the medium term, was the housing crisis in the USA. The stagnation of credit markets on a global scale was combined with deceleration in the growth of housing prices in Europe and America.
With that being said, the situation in Bulgaria seems almost exactly the opposite. On one hand, credit (both for households and the corporate sector) not only does not decline, but even on the contrary – accelerated at record-high rates. On the other hand, the price growth of common housing estates in Bulgaria is among the highest in the world for the past year. These developments served again as an argument to some foreign analysts seeing the credit boom, the housing market “balloon”, the accelerated inflation and the current account deficit as clear signs for “overheating” of the economy.
At least for now the impact of the world financial crisis has reflected most notably on the Bulgarian stock exchange, partially due to foreign capital withdrawal. In the same time, the banking credit expansion continues. According to latest BNB data the corporate credit is growing at some 70%, while the household credit at some 53%. These rates seem relatively high and are often considered temporary and unhealthy. In the Euro area for example the business credit growth is at some 14% annually, while the household indebtedness to the banking system grows at 6% (as of end-2007). Comparisons between credit dynamics in Bulgaria (in the role of emerging market) and mature markets however must also take into account differences in the credit penetration. In Bulgaria for example the ratio of the housing credit to the nominal volume of the economy is slightly above 10%, in the Euro area it is almost four times higher.
Meanwhile, despite the accelerated credit expansion the share of bad credit in the credit portfolio remains stable. Most empirical studies show that the probability of delinquency increases with the growing age of the loans. In Bulgaria this effect is boosted by most banks’ marketing strategies, including initial period of lighter credit servicing terms. Furthermore, promotional campaigns of banks with large credit market share often coincide in time. On one hand, with the increasing of credit penetration there will probably be certain worsening of credit portfolios. On the other hand however, Bulgarian banks have not yet actively entered the higher risk credit segment.
What is more, Bulgarian banks operate in under a currency board, as the conducted by the BNB and the government policy remains considerably restrictive. The Bulgarian government systematically registers high budget surpluses, while BNB raised significantly the minimal required reserves. Opposite to the US for example, where the conditions for the credit boom (and the following crisis) are mostly attributable to the loose monetary policy of the Federal Reserve, which reduced the intended funds rate to 1% in the mid-2003. In the same time, with the advancement of the integration of the Bulgarian financial system into the European one, the process of convergence toward European interest rates will accelerate. In other words, the interest dynamics on the local banking market will become even more dependent on monetary policy of ECB and developments on the European interbank market. Furthermore, after the introduced by BNB credit restrictions in the beginning of September banks more actively use alternative channels for attracting financial resource, as in January net foreign liabilities, accumulated by Bulgarian banks, grew to some BGN 4.4 billion (being some 600 million in August 2007).
Still, dominating expectations are for certain slowdown of credit expansion, considering both higher price of credit on the interbank market and the higher nominal volume of granted credit in the beginning of 2007 (and the higher base respectively).
With that being said, the situation in Bulgaria seems almost exactly the opposite. On one hand, credit (both for households and the corporate sector) not only does not decline, but even on the contrary – accelerated at record-high rates. On the other hand, the price growth of common housing estates in Bulgaria is among the highest in the world for the past year. These developments served again as an argument to some foreign analysts seeing the credit boom, the housing market “balloon”, the accelerated inflation and the current account deficit as clear signs for “overheating” of the economy.
At least for now the impact of the world financial crisis has reflected most notably on the Bulgarian stock exchange, partially due to foreign capital withdrawal. In the same time, the banking credit expansion continues. According to latest BNB data the corporate credit is growing at some 70%, while the household credit at some 53%. These rates seem relatively high and are often considered temporary and unhealthy. In the Euro area for example the business credit growth is at some 14% annually, while the household indebtedness to the banking system grows at 6% (as of end-2007). Comparisons between credit dynamics in Bulgaria (in the role of emerging market) and mature markets however must also take into account differences in the credit penetration. In Bulgaria for example the ratio of the housing credit to the nominal volume of the economy is slightly above 10%, in the Euro area it is almost four times higher.
Meanwhile, despite the accelerated credit expansion the share of bad credit in the credit portfolio remains stable. Most empirical studies show that the probability of delinquency increases with the growing age of the loans. In Bulgaria this effect is boosted by most banks’ marketing strategies, including initial period of lighter credit servicing terms. Furthermore, promotional campaigns of banks with large credit market share often coincide in time. On one hand, with the increasing of credit penetration there will probably be certain worsening of credit portfolios. On the other hand however, Bulgarian banks have not yet actively entered the higher risk credit segment.
What is more, Bulgarian banks operate in under a currency board, as the conducted by the BNB and the government policy remains considerably restrictive. The Bulgarian government systematically registers high budget surpluses, while BNB raised significantly the minimal required reserves. Opposite to the US for example, where the conditions for the credit boom (and the following crisis) are mostly attributable to the loose monetary policy of the Federal Reserve, which reduced the intended funds rate to 1% in the mid-2003. In the same time, with the advancement of the integration of the Bulgarian financial system into the European one, the process of convergence toward European interest rates will accelerate. In other words, the interest dynamics on the local banking market will become even more dependent on monetary policy of ECB and developments on the European interbank market. Furthermore, after the introduced by BNB credit restrictions in the beginning of September banks more actively use alternative channels for attracting financial resource, as in January net foreign liabilities, accumulated by Bulgarian banks, grew to some BGN 4.4 billion (being some 600 million in August 2007).
Still, dominating expectations are for certain slowdown of credit expansion, considering both higher price of credit on the interbank market and the higher nominal volume of granted credit in the beginning of 2007 (and the higher base respectively).
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