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How could global economy shocks transfer in Bulgaria
submited on 28.01.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 28.01.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Most analyses on “too high” inflation in recent months in fact started the much broader debate on the transfer of external shocks into the Bulgarian economy. Since several years the global economy works under rising prices of mineral resources and energy sources. When however in 2007 the increasing price of crops was added, the effect on prices in Bulgaria became significant enough to attract attention.
This “channel” for transferring external shocks is relatively obvious. Thus far however, it had almost neutral impact on a macro level. High energy prices meant higher business expenses, but in the same time mining industries profited from boosted global demand. To this we could add also the estate prices growth, which stimulated construction to an extent, that energy costs of construction entrepreneurs were not sufficient factor to cease growth.
After the worldwide spreading crisis, induced by the mortgage market in the US, overall pessimism about global economy is being generated. It was supported also by the decline on the global world stock exchanges in the recent few days and even led to the FED making urgent decisions for cutting interest rates. Despite this, with a high level of confidence we could forecast that the following months several things will happen – realizing losses from wrong investment decisions in the past, decline in real estate investments on a global scale, raising attention and avoiding risk assets.
The immediate channels for “importing” external negative effects are few. First, the re-estimation of risk and the change of savors’ preferences will probably lead to portfolio investments’ contraction. Portion of the capital allocated to Bulgaria is managed by institutional investors, which will be put under serious pressure to limit their risk expositions. Despite the favorable economic development in the last 10 years Bulgaria is still being considered as a country with relatively high risk. When we add also the traditional “staring” at the current account deficit, it is highly probable for a certain capital “exporting” from Bulgaria to take place. This will mean lower stock prices and weaker chances for future fund raising via the stock exchange. The immediate effect however will become visible through “the getting poor” of the local stock investors, which would lead to weaker demand for real estate, commodities and services.
Second, the real estate market will be directly affected in two segments – the big projects and, being financed by institutional investors, and vocational properties. The shift in expectations of the market development on a global scale will make institutional investors reduce their risk exposition, and Bulgaria falls in this category to many. The purchases of “second home” from wealthy citizens of Great Britain and Ireland will decline, and some of them will have to sell, in order to cover growing expenditure on credit or for covering losses, realized in their own countries. The scale of this influence will be medium-high for the Bulgarian economy. Although real estate investments represent more than 1/3 of total foreign direct investments, the development of construction will be supported not only by public infrastructure projects, but by housing projects in biggest cities.
Secondary effect on the real estate market could be expected by some financial institutions’ decisions to limit resources, allocated to housing credit. This will mean more strict requirements toward credit claimers and deceleration of the process convergence of interest levels toward the ones in the Euro area. Declining demand will put some pressure on asked prices, which will reduce the growth rates of common housing prices.
The two above-mentioned factors could lead to reduction construction sector growth, and therefore – fewer investments, lower consumption of commodities and prices and deteriorating employment. The related to construction and furniture sectors, which expanded considerably fast in recent years, will have to shrink in response to the decline in supply growth. However this effect would not be too big, considering the overall Bulgarian households’ income growth and increasing opportunities for consumption of such goods and services.
If we have to compare the exposition of the economy to external risks now and 2 years ago, we have to register increase. The integration of the Bulgarian economy into the global markets implies that we will feel to a much larger extent not only the benefits of growth, but also the negativity of crisis. Nevertheless, the relatively low income and productivity level still makes of Bulgaria a profitable place for investments, if favorable business environment and government policy are being maintained.
This “channel” for transferring external shocks is relatively obvious. Thus far however, it had almost neutral impact on a macro level. High energy prices meant higher business expenses, but in the same time mining industries profited from boosted global demand. To this we could add also the estate prices growth, which stimulated construction to an extent, that energy costs of construction entrepreneurs were not sufficient factor to cease growth.
After the worldwide spreading crisis, induced by the mortgage market in the US, overall pessimism about global economy is being generated. It was supported also by the decline on the global world stock exchanges in the recent few days and even led to the FED making urgent decisions for cutting interest rates. Despite this, with a high level of confidence we could forecast that the following months several things will happen – realizing losses from wrong investment decisions in the past, decline in real estate investments on a global scale, raising attention and avoiding risk assets.
The immediate channels for “importing” external negative effects are few. First, the re-estimation of risk and the change of savors’ preferences will probably lead to portfolio investments’ contraction. Portion of the capital allocated to Bulgaria is managed by institutional investors, which will be put under serious pressure to limit their risk expositions. Despite the favorable economic development in the last 10 years Bulgaria is still being considered as a country with relatively high risk. When we add also the traditional “staring” at the current account deficit, it is highly probable for a certain capital “exporting” from Bulgaria to take place. This will mean lower stock prices and weaker chances for future fund raising via the stock exchange. The immediate effect however will become visible through “the getting poor” of the local stock investors, which would lead to weaker demand for real estate, commodities and services.
Second, the real estate market will be directly affected in two segments – the big projects and, being financed by institutional investors, and vocational properties. The shift in expectations of the market development on a global scale will make institutional investors reduce their risk exposition, and Bulgaria falls in this category to many. The purchases of “second home” from wealthy citizens of Great Britain and Ireland will decline, and some of them will have to sell, in order to cover growing expenditure on credit or for covering losses, realized in their own countries. The scale of this influence will be medium-high for the Bulgarian economy. Although real estate investments represent more than 1/3 of total foreign direct investments, the development of construction will be supported not only by public infrastructure projects, but by housing projects in biggest cities.
Secondary effect on the real estate market could be expected by some financial institutions’ decisions to limit resources, allocated to housing credit. This will mean more strict requirements toward credit claimers and deceleration of the process convergence of interest levels toward the ones in the Euro area. Declining demand will put some pressure on asked prices, which will reduce the growth rates of common housing prices.
The two above-mentioned factors could lead to reduction construction sector growth, and therefore – fewer investments, lower consumption of commodities and prices and deteriorating employment. The related to construction and furniture sectors, which expanded considerably fast in recent years, will have to shrink in response to the decline in supply growth. However this effect would not be too big, considering the overall Bulgarian households’ income growth and increasing opportunities for consumption of such goods and services.
If we have to compare the exposition of the economy to external risks now and 2 years ago, we have to register increase. The integration of the Bulgarian economy into the global markets implies that we will feel to a much larger extent not only the benefits of growth, but also the negativity of crisis. Nevertheless, the relatively low income and productivity level still makes of Bulgaria a profitable place for investments, if favorable business environment and government policy are being maintained.
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