59.8 billion levs  have been held in Bulgarian banks in May 2009 which is a decrease by 437 levs, according to the Bulgarian National Bank (BNB). This is the second most serious decrease of the amount of money in the Bulgarian banks since the beginning of the year. This is mainly due to the fact that the amounts which foreign banks and other foreign credit institutions keep in Bulgaria have decreased by 390 million levs in May 2009.  Despite this the amount which they keep here is not small – 15.4 billion levs.

In comparison   personal savings total 22.8 billion levs and the total of the funds of companies in Bulgarian banks is 19 billion levs.  The personal savings have decreased by 100 million levs despite the attracting interest rates of savings. The total amount of the  money in companies’ accounts has slightly increased.

From January 2009 the level of the  money in the accounts held at the Bulgarian banks tend to fluctuate both ways on almost permanent  basis.  The most significant withdrawals took place in January and in May.  In January about 800 million levs have been withdrawn, 500 million levs of them were withdrawn by foreign banks. The Bulgarian companies withdrew 600 million levs but personal savings increased by 340 million levs.

The personal accounts have a positive balance while the companys’ accounts are in the red.  In May individuals held 22.8 billion levs in their accounts while they had credits amassing to 17.7 billion levs. The companies at the same time held 19 billion levs into their accounts but they owe the banks 32 billion levs.  On the whole the Bulgarian banking system is one of the few in the EU which is profitable. Its profit in the end of May 2009 was 402 billion levs. The liquidity index is 20.6% which means that 20% of the attracted funds in the banks can be immediately paid in cash if requested.

According to the State Agency for Tourism (DAT), three-four hotels go bankrupt every week in Bulgaria. They are unable to re-pay their mortgages. Many hotels are put for sale but there are no buyers and banks repossess them but it remains unclear if the banks will be able to sell them.

It seems that Bulgaria follows the road of Spain where the state buys the bankrupted hotels and demolishes them, in order to create parks.

According to the statistics, in the first half of the last year, 820 new hotels have opened on the Black Sea coast. As result of the construction boom the number of hotels and holiday properties is much higher than the number of  the tourists.  Many hotels can not sell all their beds and their owners suffer losses. All this makes it impossible for the hoteliers to repay their mortgages and other credits and go bankrupt.

Property prices in Bulgaria have fallen by 13.57% in the first quarter of 2009 in comparison with the same period last year, according to the Global Property Guide. This time last year the Bulgarian property prices have registered an increase of 16%. Now, in 14 countries the property prices have dropped by more than 10%. The main reason for this tendency in Bulgaria is the drop in the number of foreign buyers.

According to the Global Property Guide the property market is in crisis in 27 out of 32 reviewed countries. The main reasons for this are the growing unemployment, stricter bank rules for landing and diminishing consumer confidence.

Only a few countries experienced increase of property prices. Switzerland is in the first place with a growth of 4% in the first quarter of 2009. The main reason for this is the stable demand supported by falling interest rates and the presence of a great number of foreign buyers. Next are Thailand, Austria and Israel with a price growth of 3%, shortly followed by Shanghai with 1.76%.

The mortgage applications in Bulgaria have increased by 20% in April in comparison to March 2009. They are mostly young professionals who work for foreign companies and have good incomes. They would like to take advantage of the good prices and think that it is worth paying higher mortgage interest. Most of them have savings which can pay for 50% of the price of the property that they would like to buy and answer to the stringent requirements of the Bulgarian banks which do not lend higher than 50% mortgages.

In connection with this and with the decreasing property prices, the average amount of the mortgage in Bulgaria has fallen down to 35 236 EUR, levels typical for the summer of 2007.

The number of mortgages lent in the first two months of the year in Bulgaria is twenty times lower in comparison with the same time last year. In January and February last year the banks lent mortgages to the value of 355 million levs, in the same months of this year the same figure was 18 million levs. The positive effect of the limiting of the landing is that for the first time in two weeks there is a tendency for decreasing the interest rate, although not by all banks. This decrease is of 0.54% for the mortgages in levs and 0.36% for the mortgages in euros. The average mortgage interest at the moment is 9.95%.

However, leading bankers think that in a recession the sensible policy is not to drop the interest rate. They have warned the developers to forget about the Brits and the Irish who used to buy all the properties at the Black Sea resorts and to focus on the Bulgarian customers, in order to survive the recession. It is expected that the Bulgarian property market will suffer mostly in September and October of this year.

According to developers the state must support the construction industry and the property market by pressing the water and electricity suppliers to offer better services.

The investment funds will be able to buy properties on territory of EU-member-states, according to the draft amendments of the law for the investment funds suggested by the Committee for Financial Supervision. Until now these funds could invest only in Bulgaria. The other significant amendment is that the minimal capital will increase from 600 000 levs to 1 million levs. The funds will be able to cooperate and work together on large property project which they would not be able to do on their own. The requirement that the depository bank which holds the money of the fund should give credits to them shall be removed. Other amendments include the possibility for investment in bonds and futures issued with the aim to finance major infrastructural projects. The requirement to obligatory increase the initial capital in order to get the right to operate as a fund will be also removed.

The rules for terminating the license of the company. The fund will be able to request it and in such case it will continue to operate as a normal company not as an investment fund.

Last year 60% of the mortgage applications in Bulgaria have been made for the purchase of a second home, according to Bulgarian bankers. Bulgarians used to buy properties for investment, expecting high returns and constantly increasing property prices.

This year the number of the mortgage applications have decreased ten times. According to bank managers this is due to the different expectations of sellers and buyers. The buyers expect prices to go further down and do not rush to buy, while sellers do not drop the prices of their properties and wait for the market situation to change back to the time of the property boom.

The banks lend much less money than before and cover a much smaller proportion of the price of the properties. At the same time prospective buyers are unwilling to take large mortgages and prefer smaller ones. Most of the buyers now have savings but they still need to borrow some money to buy a property.

Leading bankers think that the lending will not go back to the levels during the property boom of the last two years. They expect that at the end of the recession the ratio of the savings to the size of the mortgage will be 50:50 and in the following new boom it will go to 30:70.

The Bulgarian bank managers expect that in the next 6 months two new types of clients will enter the property market. The first type are people with good incomes and substantial savings. Currently, in Bulgarian banks there are 110 000 savings accounts with amounts exceeding 30 000 levs (15 000 Euros) with 76 000 levs (38 000 Euros) on average per account, according to the official statistic of the Bulgarian National Bank. Obviously, these people wait for the right moment to invest.

The second type are people who are not covered by the official statistics. They either keep their money at home or have incomes from the grey economy. Such kind of customers usually apply for mortgages that cover 20% to 30% of the price of the property.

At the moment the mortgage interests of Bulgarian banks are between 8% and 10%. Nobody expects any change until the end of the year, as bankers wait for the first encouraging signals from the U.S.A and Europe, in order to make a move.

Although banks’ interest rates of savings accounts are still high, in February those of one- and three-month deposits started decreasing. At the same time the interest rates for six- and twelve-month fix term saving deposits are still increasing.

UniCredit Bulbank did not continue with their promotions and decreased the interest rate of the fourth period of their Increasing Interest scheme from 12% to 9% for the deposits in levs and from 10% to 7% for the deposits in Euros. The interest for their one year fix term deposit has dropped from 8.80% to 4.85%.

First Investment Bank did not continue their promotion Golden Deposit. The bank has launched their product March Deposit, a three month fix term deposit with interest rate, both for deposits in Euros and in levs, of 8.75% instead of 9.75% like the previous promotion.

Most other banks still keep increasing the interests of savings accounts in order to attract fresh money. Among them are: PostBank, Raiffeisenbank, Eibank, Invest Bank and Alpha Bank.

Concerning customer loans, all banks have increased their interest rates by about 1% in February, apart from Alpha Bank who decreased it by 0.7%.

Most of the mortgage rates have not increased and in the rare cases of an increase, it does not exceed 1%.

In 2008 in Bulgaria the number of purchases of property was 309 788 which was 4.79 % less than in 2007 when their number was 325 385.
The direct foreign investment in property in Bulgaria in the first nine months of 2008 amounted to 1190.5 million Euros which is a decrease of 33.34% in comparison to 2007. At the same time the direct foreign investment in construction in the same period showed a decrease of 27.99% and amounted to 405.2 million Euros.
The average property price increase in Bulgaria for 2008 was 14.88% due to the expansion of the construction industry in the first half of the year unlike the stalemate of the last months. The average increase of the rent was 4.74%. Most of the buyers in 2008 were Bulgarians and Russians. The average monthly yield in 2008 was 6.34% which is about the average for Europe. In Sofia it was 5.89%, in the second largest Bulgarian city Varna it was 4.97%, while in Plovdiv, the third city it was 4.86%.
The average mortgage in February was 36 100 Euros. Mostly people who have savings able to cover 40% of the price of the property take mortgages at the moment. In Sofia the average mortgage was 45 200 Euros, in Varna – 36 140 Euros, and in Plovdiv – 25 400 Euros. Nobody takes mortgages exceeding
70 000 Euros at the moment and the banks do not lend mortgage which cover 80% or 90% of the price of the property.

Russians buy hotels on the Bulgarian Black Sea cost for peanuts. They hire estate agents to look for cheap property, mainly hotel owners who are on the verge of bankruptcy or developers who cannot complete their projects. They also buy already developed projects for holiday resorts which have been denied financing from banks. About ten very good purchases at attractive prices have been completed since the beginning of the year. Most of them are for about 500 Euros per sq m. The jewel in the crown is a four story hotel in Svety Vlas the area of which exceeded 1000 sq m. The hotel sold for 300 000 Euros. The Russians invest their money in Bulgaria in order to save them, as the trust in the Russian banks have sharply decreased over the last six months.

Due to the recession the banks have now offered higher interest rates for savings accounts which range from 6% to 10%. The most popular are fifteen day, one month and three month savings accounts because there is no loss of the interests.

With the increase of the savings accounts’ interests, the loan interest has also increased by 2% on average. Concerning  mortgages, in the last months there has not been any increase due to the fact that customers are unwilling to take new mortgages. The interest rates remain 8% for the mortgages in Euros and 9,5% for the mortgages in levs.

The Bulgarian banks have introduced tougher rules for lending money after two days of stopping crediting. Now they lend money only for the purchase of properties which can be easily sold if reposessed. Families with total income under 1500 levs per month can not take a mortgage to purchase an apartment in one of the larger cities. To such families the banks offer only small size credits with monthly instalments not exceeding 50 Euros. While in the past the banks were satisfied if the monthly repayment instalments were up to 50% of the total income of a family, now they restrict the instalments to not more than 39% of the monthly income. The average mortgage interest is 8.2% per annum and the average instalment is 360 Euros per month, which is an increas of 40 Euros for the last six moths.

The collapse of the banks in the West is a serious warning for the future of Bulgarian banks. In the last three-four years, the Bulgarian banks enjoyed enormous profit and record growth levels but the world financial crisis is going to put an end to this.

Almost all Bulgarian banks have started to change their development policy following September, 14.  Almost all plans for the opening of new branches have been frozen. The major problem in the banking sector is the lack of fresh money. The foreign financing has stopped and now all Bulgarian banks have focused on the domestic market to keep their growth. It is expected that a within a year a real war to attract deposits of new clients will unleash and the perks for the clients will include holidays abroad and golden watches.

However the biggest loser will be the business and the ordinary consumer. Many banks have changed their policy to attract new clients and now focus on keep the reliable clients with a good track record. It will be very difficult to get a credit if you are a new company. The price of this will be high for the Bulgarian economy – so far the banks have been the major force of the economic growth.

According to the report of the World Bank about the economic development of 29 countries in Eastern Europe and the former Soviet republics published on 2 July 2008, the long-term challenges for Bulgaria’s economic development are the growing age of the population, the need for higher productivity and the stimulation of the competition.

The country is more threatened by the demographic factors then any other country in the region. By 2025 the population of Bulgaria will decrease by 1/5 and the number of the old age pensioners will increase dramatically. In the last years the ratio of the number of the employed Bulgarians to the number of people in active age has been between 50% and 60%, while this ratio for the other EU member-states  has been 70%.

In addition to this, Bulgaria, alongside Hungary is an active exporter of labour force. By 2015 the number of people in active age will sharply decrease and the Bulgarian government needs to prepare a plan of action now.

The World Bank insisted that Bulgaria and Romania should aim at a better integration into the world market by liberalizing the prices and improving the quality of the services in telecommunications, transport, energy and banking. Both countries should invest in the export of capitals and the production of highly skilled labour force. Bulgaria has to use the foreign investments in the country for developing new products at competitive prices.