The Banking Market in Bulgaria 2009 - CEE Banking Series

Economic outlook.

In recent years the Bulgarian GDP has been growing stable at 4 to 7% p.a. resulting in almost tripling of GDP per capita to 4520EUR in 2008 against 1999. The initially high unemployment rate dropped below 6% in 2008. Growth of the economy together with a tight budget policy of the government resulted in cash surplus and impressive reduction of public debt. The major problem that could not be solved so far is persisting inflation and widening current account imbalance. A fixed FX rate regime will put the currency as well as the whole economy under certain pressures in 2009, although the overall stability of the Bulgarian economy is better if compared with other CEE countries maintaining fixed FX rates, especially Baltics.

EU accession and reforms.

The long expected accession to EU came true in Jan. 2007. On the way to EU Bulgaria has done a big effort to comply with various EU requirements and regulations. Moreover, to make the country competitive and attractive place to invest, the fiscal policy has been significantly eased, including introduction of low corporate tax rate of 10% (effective 2007), and personal income tax flat rate of 10% (effective 2008), changes that made Bulgaria an attractive place to invest in Europe. Unfortunately the persisting corruption and frequent scandals in public sector are affecting quick development of infrastructure and delay flow of EU subsidy payments.

Banking market growth.

The banking market has been developing fast from 2001 on. Since 2004 both, retail and corporate lending volumes are surging. Already in 2005 the Central Bank addressed acceleration in loans with introduction of penalties on excessive credit growth. Applied measures proved to be successful and contributed to moderating of lending growth. As a sideeffect the unsatisfied demand for loans (especially in corporate sector) moved to other financing forms as: leasing, corporate bonds or equity markets. Unfortunately, at the end of 2008 a significant deceleration of growth in case of key banking volumes could be observed, which is the first sign of worsening economic climate.

Neutral future outlook.

In our view, despite the global turmoil, future prospects for the banking sector in Bulgaria are still relatively good. The year 2009 may be difficult with stagnating volumes, falling margins and mounting operating costs. However, most banks in Bulgaria seem to be well prepared for the situation with enough own funds and retained profits. The adequate response to growing costs and lending portfolio quality will be unavoidable. Intelace Research expects that banks assets will keep growing at 9% in nominal terms through 2011, to reach 89 billion BGN. It can be also expected that most of volumes growth will come from retail segment since corporate business is likely to stagnate in 2009, resuming growth first in the years 2010-2011.