With the Central Bank this week approving new measures to open up Bulgarian bank accounts to international transfers next year, the circulation of money is likely to be vastly improved. However, many in the sector remain worried about the country’s continuing credit boom, with a series of steps aimed at throttling this back coming into force as the month began.
The Bulgarian National Bank (BNB) announced its approval on April 7 for the new circulation measures, which involve changing the numbers on some 12m bank accounts.
“The scale of such an operation is comparable only to the re-denomination of the lev,” banker Dimitar Kostov told the paper 24 Chasa the following day.
The result will be that on March 1 next year, Bulgarian bank account holders will have to visit their local branches and obtain the new numbers. Then, from July 1, 2006, these bank accounts will be accessible throughout Europe. Automatic, secure and fast transfers of money to and from any EU member country will then become possible, radically overhauling the current slow, expensive and manually operated system.
Good news for customers, although the announcement does also come at a time when market watchers are pondering the results of several official attempts to reign in growing demand for credit, a phenomenon frequently cited by the IMF – amongst others – as a cause for concern in the Bulgarian economy.
BNB figures released on March 25 show that there was no real slowing in the growth of credit during February, with a trend towards lower mortgage rates highlighted as one major cause. Credit growth for the month was much the same as January, the business paper Capital reported. In February, some Lv305.34m ($202.13m) in new loans was extended by Bulgarian banks, raising the total credit volume to Lv14.5bn ($9.6bn), before provisions.
This was a 2.15% rise, month-on-month, compared to a rise of 2.77% in January. Looked at year-on-year, this produced a worrying 46.9% increase.
In terms of types of loans, corporate borrowing continued to account for the lion’s share, at 68.42%, or a record total of Lv9.92bn ($6.57bn) since February 2004. Commercial credit was the smallest, showing a 1.95% rise, yet home purchase and mortgage credits went up a significant 5.7% to Lv1.11bn ($736.13m). Meanwhile, consumer loans jumped by 3.98%, to Lv2.9bn ($1.92bn).
Behind all this was a significant boost in deposits. These were up 1.73%, month-on-month, to a total of Lv19.42bn ($12.86bn), with the largest increase, at 6.61%, in euro deposits.
Faced with these statistics, throttling back credit remains a key government priority. Widely heralded steps to do this, announced at the end of February and due to come into force on April 1, came after a heated series of advertising campaigns for credit by the banks, whose profits were up some 38.35% in February, year-on-year. The banks denied that there was any connection between the timing of their efforts to attract more customers and the imminent credit controls, although few outside observers were convinced.
The April 1 measures require banks that exceed quarterly growth limits to deposit with the BNB additional minimum obligatory reserves. These are set at an amount equal to double the amount that exceeded the quarterly growth barrier. These steps apply to commercial banks whose credit portfolio exceeds the limit by 6% for the first quarter, 12% for half a year, 18% for nine months and 24% year-on-year.
The BNB February figures showed that the country’s largest banks, in terms of assets, saw an average credit growth of 2.6%, month-on-month, easily ahead of the new limits. These banks include DSK Bank, Bulbank, United Bulgarian Bank and HVB Bank Biochim. Of these, DSK Bank has been one of the most aggressive lenders, extending almost half of all consumer loans, year-on-year.
At the same time, the BNB also raised its base rate on April 1, from 1.91% to 1.95%.
Analysts remain divided as to the likely effect of these measures, with Capital reporting late March that many bankers had already found ways to soften the blow to their credit portfolios. Just how this will effect the country’s current account deficit – the main governmental and IMF worry over growing credit use – is also therefore open to question. Some analysts are already predicting the likelihood of a further package of controls later this year.
Also worth watching is the BNB’s Central Credit Register, which classifies loans according to their risk of default. Standard risk exposures fell 0.97% between January and February, from 93.83% to 92.86%. Meanwhile, the portion of watch loans – those in which principal or interest arrears payments are 31 to 60 days past due dates, increased 0.77% month-on-month.
Not a landslide, but a reminder that credit runs its risks. While the current account deficit may be offset by large foreign direct investment (FDI) inflows, and economic growth continues to be high, a recent European Commission report giving economic forecasts for spring 2005 foresees growth surging at around 6% this year, but then falling off in 2006. As for the current account deficit, the EC expects this to remain high at 8.5% of GDP in 2005, falling to 7% the following year due to more favourable terms of trade and a gradual improvement in competitiveness, thanks to high fixed investment over the past few years.
A comforting thought, though how the credit boom is handled will also have a likely impact on all those figures.
