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Speculations on the currency board future may be dangerous
submited on 26.10.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 26.10.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
The guarantees for financial stability in the country seem important on the background of the ever-growing and frequent pessimistic forecasts by external analysts of the development of Bulgarian economy and the monetary regime – forecasts whose logic seems odd to us, the Bulgarian economists.
Ten years after the abolishment of independent monetary policy and the introduction of the fixed exchange rate the benefits of applying the currency board regime are undisputable – the economy is growing steadily and the welfare of Bulgarians is continuously improving. And although there are certain imbalances, on the whole (on a macro scale) Bulgarians are getting wealthier. The estimated by us (on a quarterly basis) household financial wealth is expanding at fast rates. As of mid-2007 the value of the financial assets held by households (banknotes, deposits, securities, holdings in mutual funds, pension and life insurances savings) is four times higher, than as of end-2000. The penetration rate exceeded 50% of GDP despite considerable growth of the nominal size of the economy. After a certain deceleration the dynamics of the net financial wealth (taking into account the level of indebtedness) accelerated again to 21.1% annually. To a large extent such a development is attributable (directly or indirectly) namely to the environment, which the currency board generates – stability in the present and foreseeable future.
In line with solid macroeconomic fundamentals – rapid economic growth, employment improvement, income growth and reduction of the tax-insurance burden, the level of confidence in the national currency and the financial system stability is one of the main factors, driving savings accumulation. The presence of such confidence is visible also from the gradual change in the risk profile and the horizon of these savings. Although bank deposits remain the biggest component in the financial portfolio of households (constituting some 61% of the financial wealth), the share of savings, allocated to long-term and riskier assets, is increasing – institutional investors (pension funds, life insurance and mutual funds) already manage 9.7% of the financial wealth, whereas direct investments in securities is expanding to 4.7%. There is also a process of transformation of hidden money balances (mainly in foreign currency, not reflected in the monetary statistics) in more profitable investment vehicles. Bank system deposits grow at stable rates (26.5% on annual basis ad of end September), although high inflation in the recent two months make real interest rates negative. Simultaneously the maturity structure is expanding – deposits with term over 2 years are already around 8% of the time deposits, while 5 years ago this share was below 1%. There is not a considerable expansion of the share of currency deposits in the last 2 years – in September 2007 they constitute some 55% of all household deposits, exactly the same as in September 2005.
The monetary statistics does not show indications of “avoiding” the BGN – in the recent months the dynamics, with which leva deposits are expanding, is accelerating, although traditionally remaining slightly more modest than forex deposits’. Recently raised in the media issue of accelerated expansion of credit in BGN, due to expected devaluation, is not confirmed – BNB statistics shows that in September household credit, denominated in foreign currency, grow at 65.5% on annual basis with 44.5% annual growth of leva credit. The share of the foreign currency credit is steadily growing, as larger part of it denominated in euro – yet another reflection of the confidence in the currency board and the perspective of accepting the single European currency. The household sector remains net creditor to the banking system, although the deposit-to-credit ratio continues deteriorating. The depositors’ confidence as a whole is kept stable, estimated via the two traditional indicators, usually used – cash-to-deposits and the ratio of M1 to quasi money M2.
Any ungrounded speculations on the currency board future and suggestions for leva devaluation can quickly reduce that confidence and seriously erode domestic savings and external resource inflow, and therefore – the economic stability itself. And this means inevitable fast wealth loss.
Ten years after the abolishment of independent monetary policy and the introduction of the fixed exchange rate the benefits of applying the currency board regime are undisputable – the economy is growing steadily and the welfare of Bulgarians is continuously improving. And although there are certain imbalances, on the whole (on a macro scale) Bulgarians are getting wealthier. The estimated by us (on a quarterly basis) household financial wealth is expanding at fast rates. As of mid-2007 the value of the financial assets held by households (banknotes, deposits, securities, holdings in mutual funds, pension and life insurances savings) is four times higher, than as of end-2000. The penetration rate exceeded 50% of GDP despite considerable growth of the nominal size of the economy. After a certain deceleration the dynamics of the net financial wealth (taking into account the level of indebtedness) accelerated again to 21.1% annually. To a large extent such a development is attributable (directly or indirectly) namely to the environment, which the currency board generates – stability in the present and foreseeable future.
In line with solid macroeconomic fundamentals – rapid economic growth, employment improvement, income growth and reduction of the tax-insurance burden, the level of confidence in the national currency and the financial system stability is one of the main factors, driving savings accumulation. The presence of such confidence is visible also from the gradual change in the risk profile and the horizon of these savings. Although bank deposits remain the biggest component in the financial portfolio of households (constituting some 61% of the financial wealth), the share of savings, allocated to long-term and riskier assets, is increasing – institutional investors (pension funds, life insurance and mutual funds) already manage 9.7% of the financial wealth, whereas direct investments in securities is expanding to 4.7%. There is also a process of transformation of hidden money balances (mainly in foreign currency, not reflected in the monetary statistics) in more profitable investment vehicles. Bank system deposits grow at stable rates (26.5% on annual basis ad of end September), although high inflation in the recent two months make real interest rates negative. Simultaneously the maturity structure is expanding – deposits with term over 2 years are already around 8% of the time deposits, while 5 years ago this share was below 1%. There is not a considerable expansion of the share of currency deposits in the last 2 years – in September 2007 they constitute some 55% of all household deposits, exactly the same as in September 2005.
The monetary statistics does not show indications of “avoiding” the BGN – in the recent months the dynamics, with which leva deposits are expanding, is accelerating, although traditionally remaining slightly more modest than forex deposits’. Recently raised in the media issue of accelerated expansion of credit in BGN, due to expected devaluation, is not confirmed – BNB statistics shows that in September household credit, denominated in foreign currency, grow at 65.5% on annual basis with 44.5% annual growth of leva credit. The share of the foreign currency credit is steadily growing, as larger part of it denominated in euro – yet another reflection of the confidence in the currency board and the perspective of accepting the single European currency. The household sector remains net creditor to the banking system, although the deposit-to-credit ratio continues deteriorating. The depositors’ confidence as a whole is kept stable, estimated via the two traditional indicators, usually used – cash-to-deposits and the ratio of M1 to quasi money M2.
Any ungrounded speculations on the currency board future and suggestions for leva devaluation can quickly reduce that confidence and seriously erode domestic savings and external resource inflow, and therefore – the economic stability itself. And this means inevitable fast wealth loss.
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