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The world financial crisis makes interest rates in Bulgaria go up
submited on 23.03.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 23.03.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
The past week set new dimensions for the crisis that world financial markets experience. The Federal Reserve for the first time since decades has undertaken measures for direct saving of individual financial institution, and on the world markets the liquidity issue was utterly replaced by confidence problems. New loosening of monetary policy followed, as the target interest rate in the US was cut by another 75 basis points, to 2.25%.
In the same time the Bulgarian statistics released good news: NSI reported 6.2% real GDP growth ? (and 14% real growth of GVA in industry), and according to revised by BNB data foreign direct investment for 2006 turned out substantially more (by some 40%) than the preliminary reported in the beginning of the year. By 7.4% more turned out direct investments for 2007, without noticing any serious fluctuations in the inflows after August 2007, when the mortgage crisis in the US began. As a small open economy with currency board Bulgaria is vulnerable to external shocks, i.e. it is realistic to expect a slight deceleration of the transposition negative effects from the global financial crisis. For the moment however, macroeconomic fundamentals are stable and do not indicate serious volatility. Foreign investments’ inflow, allocated to Bulgaria, cover most of the current account deficit.
As we expected, the international crisis was immediately felt on the stock exchange, mainly due to withdrawal of foreign portfolio investments. Such a development is rational – the growth potential of the Bulgarian capital market, although still significant, begins to diminish, whereas risk remains considerable. This combined with the more difficult access to debt financing on a global scale and the shift in foreign investor attitude toward risk leads to withdrawal of financial resource from the Bulgarian stock exchange. With the lack of market depth (and flexibility respectively) investment outflows reflects considerably on prices. Furthermore, with regard to the still relatively poor investment culture of the common investor and the predominantly speculative interest, driving the trade, the reversing of the upward price trend leads to additional sales. This is also evident from the decreasing interest toward holdings in mutual funds, which last year gained popularity namely among more speculatively driven individual investors. We expect under the current situation the attractiveness of the stock exchange as a channel for attracting financial resource to temporarily decline, i.e. probably in the short term many of the planned initial public offerings to be postponed. This will additionally reflect on the market depth and the dynamics of the stock exchange trade in the coming months.
The bank statistics on the side shows that the international financial crisis has not for the moment reflected directly on the banking business in Bulgaria. Although registering certain seasonal decline in January, on annual basis bank system assets continue to grow steadily (38.2%). For the moment there are no indications for tension on the credit market. The dynamics of the net foreign assets did not show significant fluctuations in the financial inflows from abroad, allocated to the Bulgarian credit market. The quality of the credit portfolio on the whole is kept good. Despite the steady increase of the household indebtedness and the deterioration of their financial leverage (the coverage of debt with assets) we do not consider that have entered actively the high-risk credit receivers. The dynamics of interest rate dynamics on credit does not show significant direct relation on the international conjuncture, and it rather follows the price dynamics of the internal resource. We expect the indirect reflection of the global financial crisis to become tangible with regard to the accelerated demand for financial resource from internal sources, combined with the growth in its price. The restrictive policy of the BNB, imposing the blocking of substantial resource in the form of higher minimal required reserves, on its side induces risk of transposition of external shocks due to increasing bank dependence on external resource.
From the standpoint of foreign direct investment potential impact of the crisis could be expected in their part, allocated to particular real estate market segments – mainly large construction projects, financed by institutional investors and the purchase of holiday properties (i.e. investments with shorter-term speculative motive). We did not expect investment outflow from particular real estate segments to cause such a contraction in the money supply, which could threaten macroeconomic stability. Main portion of direct investments in Bulgaria are based on long-term investment interest, which makes them relatively stable with regard to current fluctuations in the international conjuncture.
In the same time the Bulgarian statistics released good news: NSI reported 6.2% real GDP growth ? (and 14% real growth of GVA in industry), and according to revised by BNB data foreign direct investment for 2006 turned out substantially more (by some 40%) than the preliminary reported in the beginning of the year. By 7.4% more turned out direct investments for 2007, without noticing any serious fluctuations in the inflows after August 2007, when the mortgage crisis in the US began. As a small open economy with currency board Bulgaria is vulnerable to external shocks, i.e. it is realistic to expect a slight deceleration of the transposition negative effects from the global financial crisis. For the moment however, macroeconomic fundamentals are stable and do not indicate serious volatility. Foreign investments’ inflow, allocated to Bulgaria, cover most of the current account deficit.
As we expected, the international crisis was immediately felt on the stock exchange, mainly due to withdrawal of foreign portfolio investments. Such a development is rational – the growth potential of the Bulgarian capital market, although still significant, begins to diminish, whereas risk remains considerable. This combined with the more difficult access to debt financing on a global scale and the shift in foreign investor attitude toward risk leads to withdrawal of financial resource from the Bulgarian stock exchange. With the lack of market depth (and flexibility respectively) investment outflows reflects considerably on prices. Furthermore, with regard to the still relatively poor investment culture of the common investor and the predominantly speculative interest, driving the trade, the reversing of the upward price trend leads to additional sales. This is also evident from the decreasing interest toward holdings in mutual funds, which last year gained popularity namely among more speculatively driven individual investors. We expect under the current situation the attractiveness of the stock exchange as a channel for attracting financial resource to temporarily decline, i.e. probably in the short term many of the planned initial public offerings to be postponed. This will additionally reflect on the market depth and the dynamics of the stock exchange trade in the coming months.
The bank statistics on the side shows that the international financial crisis has not for the moment reflected directly on the banking business in Bulgaria. Although registering certain seasonal decline in January, on annual basis bank system assets continue to grow steadily (38.2%). For the moment there are no indications for tension on the credit market. The dynamics of the net foreign assets did not show significant fluctuations in the financial inflows from abroad, allocated to the Bulgarian credit market. The quality of the credit portfolio on the whole is kept good. Despite the steady increase of the household indebtedness and the deterioration of their financial leverage (the coverage of debt with assets) we do not consider that have entered actively the high-risk credit receivers. The dynamics of interest rate dynamics on credit does not show significant direct relation on the international conjuncture, and it rather follows the price dynamics of the internal resource. We expect the indirect reflection of the global financial crisis to become tangible with regard to the accelerated demand for financial resource from internal sources, combined with the growth in its price. The restrictive policy of the BNB, imposing the blocking of substantial resource in the form of higher minimal required reserves, on its side induces risk of transposition of external shocks due to increasing bank dependence on external resource.
From the standpoint of foreign direct investment potential impact of the crisis could be expected in their part, allocated to particular real estate market segments – mainly large construction projects, financed by institutional investors and the purchase of holiday properties (i.e. investments with shorter-term speculative motive). We did not expect investment outflow from particular real estate segments to cause such a contraction in the money supply, which could threaten macroeconomic stability. Main portion of direct investments in Bulgaria are based on long-term investment interest, which makes them relatively stable with regard to current fluctuations in the international conjuncture.
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