The Bulgarian property market has entered into a constant slum and it is expected that the earliest in 2011 it will pick up, according to developers, analysts and estate agents.

This conclusion is based on the expectation for a deep recession in the country in the next two years. Prominent business analysts think that the recovery of the property market in Bulgaria entirely depends on the economic development of the country. The boom of the property market coincided with the economic boom. However, now the forecast of the IMF for Bulgaria is most worrying – recession in the next two years, high unemployment and shrinking of the spending. Traditionally, the economic process in Bulgaria lags behind the one in the developed Western countries. Only in case that Bulgaria starts using the European funds properly and more companies from Western Europe relocate in Bulgaria by 2010 the country will reach the lowest point of the economic recession and the economy will start moving upwards.

According to the IMF report about Bulgaria, 3,5 billion BGN from the planned budget income will not be collected in 2009 due to the recession. This will mean automatic activation of the so-called 10% rule – shrinking of the expenses of all ministries and government agencies by 10% in order to achieve an annual budget with a small profit.

The current IMF mission in Bulgaria aims to establish the economic situation in the country. The most dramatic development is the inability to collect VAT to the value of about 3 billion BGN from the initially planned amounts. The most optimistic forecast of the National Revenue Agency is that the VAT collection will be 5% less than the planned for 2009 or an amount exceeding 110 million BGN, which still will be an increase of 6% in comparison to last year.

Generally, the tax collection might increase by 12% in comparison with last year.

Concerning the collection of Capital Gain Tax, the optimistic forecast underlines that 14% or 360 million BGN will not be collected. Still the collection of Capital Gain Tax will be 2% more than last year.

According to the IMF report, the decrease of income will force Bulgaria cut the budget expenses to the value of 1,7 billion BGN in 2009. The state expenses must be cut, as well as the salary increases, because the economic growth in 2009 will slow down to 1%.

The decrease of lending and of the foreign investment will lead to the shrinking of sales in the country. This in combination with the decrease of property prices and the possible increase of the number of bad debt might lead to shrinking of the economy and a negative GDP growth of – 3,5%, according to the pessimistic forecast of the IMF.

Bulgaria has a budget surplus but it can easily slide into a budget deficit of 1.5% of the GDP, according to the Italian Unicredit Group. The recession in Bulgaria is inevitable and will last 2 years, say the analysts. According to the expectations, the country’s economy will shrink by 3% in 2009 and by another 1% in 2010. It is expected that the budget will move from 3% surplus in 2008 to a 0.4% deficit in 2009 and a deficit of 1,5% in 2010.

The inflation is expected to fall to 3.5% for 2009 and to 1,8% in 2010 – which will be one of the few positive effects from the shrinking of the economy. The other positive effect will be the decrease of the current account deficit.

The most serious problem of Bulgaria is the sharp decrease of the foreign investment in the country which is expected to lead to a high unemployment exceeding 10%. It is expected that the unemployment will reach 12% in the next year.

The foreign investment will be 50% less than last year – from 16.7% to 7.5% of the GDP.

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.

The Bulgarian economy has been affected by the world recession. The growth of Bulgaria’s GDP in the last quarter of 2008 was just 3.6%, according to the National Statistics Institute. This is an almost two fold slowing down – in the previous quarters the GDP’s growth was between 6.8% and 7.1%.

After Bulgaria moved out of the hyperinflation and the recession during the rule of the government of Zhan Videnov (1996-1997), the economy’s growth has never been so small, except once, nine years ago, in the last quarter of 1999 when the GDP grew by 3,5%. Since then the Bulgarian economy has been growing steadily and the annual growth in the last six years was never under 4%.

The Bulgarian industry has suffered the hardest blow. In the last quarter of 2008 it has had a negative growth of -0.1%. The export has decreased by 6,8% in October-December 2008. At the same time the import has shrunk by 3.7%. The growth of the GDP, although rather small, is due to the growth of the agricultural production of 20.6%. The reason for this is mainly the good harvest.

For the whole of 2008, the GDP’s growth was 6% which was due to the active economic growth in the first nine months of the year. Bulgaria’s GDP for 2008 was 66 billion levs.

In the last years the bank credits have been the driving force of the Bulgarian economy. Now the credit flow has dried up, the money from the gray economy has become the majour factor.

Only credits to the amount of 33.6 million levs have been lent by the banks to Bulgarian businesses in December 2008. In comparison, the average amount of the business credits for 2008 is 626.9 million levs.

Many companies have been experiencing cash flow problems and they can not pay their expenses. The bad debt has increased and some analysts expect 30% of the companies in the country to go bankrupt. Others are more moderate in their expectations and do not expect a total collapse.

The construction industry is in a very bad state, despite the opinion of the analysts. The need for fresh cash is so serious that some of the companies have switched to barter deals. They offer their business partners apartments and office space instead of cash.  The problem of many developers is that they have started several projects at the same time and have relied on off-plan purchases. However, once the credit policy of the banks became more strict, the off-plan purchases have stopped.  As result, many investors had to freeze their projects, some of them stopped paying their subcontractors and suppliers. The banks have ignored the whole of the construction industry and now lend money only to companies who also work in another field of business, which can guarantee the repayment of the loans. There is still no official information about the level of debt in the construction industry but it is expected to be quite serious.

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.

Despite the steady growth of the Bulgarian economy, the international financial crisis is unlikely to miss Bulgaria. The Bulgarian economy is not dependent on the US economy, however 2/3 of the Bulgarian trade relations are with the EU countries, where the signs of recession are rather obvious.  According to the experts the recession will affect Bulgaria in 1 -1.5 years.  It might start in the winter when household expenses are higher, as well as the inflation.  The economic growth is likely to stop due to the slowing down of the property market and the interest increase.

The growth of Bulgaria’s GDP in the first six months of this year of 7% is one of the highest in the E.U. Only Romania with growth of 9.3% and Slovakia with 7.6% have better results than Bulgaria.The added value is 12.994 billion levs which is equal to 6.7%.

The big surprise comes from the agriculture which has been decreasing until this year when it showed growth by 11.7% in comparison with the first half of last year. The added value of the plant growing has incresed by 25% according to the National Statistics Institute. At the same time the added value of the industry has increased by 7.2%, while the one of the services have increased by 5.8%.

The best performer is the chemical industry with an increase of 26%, financial services are in second place with 21%, while metal production is in third place with 20%. Construction industry has shown slower progres of just 7.7% in comparison with 11.7% in 2007. Only the textile industry has shown decrease of 3.5%.

Despite the recession, Bulgaria is still attractive to foreign investors. The investments have reached 34.8% of the produced GDP.

The construction boom on the southern Bulgarian Black Sea coast started six years ago. Now, some of the resorts look like town ghettos rather than places to relax. The investors have not taken seriously into account the forecasts of the market researching companies which warned about the slump and as result the supply has exceeded the demand in the last two years. Now the investors can not sell their developments and the prices have dropped by 50% in comparison to the last year. It is difficult to say how many apartments are unsold in Sunny Beach but experts claim that their number has reached as many as 30 000. In 90% of the cases the developers have taken mortgages for the construction of these properties and it is unclear how they will repay them.

Some experts claim that in order to solve the problems at the Black Sea resorts all hotels within 100 metres from the seashore must be demolished and the land transformed into parks, just like in Spain.

Bulgaria’s GDP has increased by 6.3% for the second quarter according to express evaluation of the National Statistic Institute. The minister of economy Dimitrov said that the real increase might reach 6.5%. The optimism is based on the good results coming from agricultural production, according to the minister. If agricultural production has kept the same levels as of 2006, the increase of the GDP would have been 8.5%.

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.

Bulgaria’s economic development depends heavily on the ability of the country’s production to compete on the European market.  From 2000 until 2006 the industry has experienced a speedy development. The invested capital has increased three times. The original capital has increased 3.4 times and the floating capital – 2.9 times. At the same time the effectiveness of expenses is low and the increase is insignificant. For this period one lev of expenses has resulted in 1.06 levs of income. The profitability of the invested capital is 6% – rather disappointing in comparison to the level of the interest rates of the bank credits. The increase of the production is mainly due to the increase of the number of producers, rather than good organisation. The reason for this is the structure of the industry which is still to a great extent ineffective. As result there is a necessity to develop a new strategy for the Bulgarian industry and to underline priorities. The emphasis should be on highly effective projects. Another significant problem related to this one is the decrease of the profitability of the long-term assets and the inadequate qualification of the workforce.

The situation is much better in relation to the use of the current assets. The improvement is obvious and it is expressed in the decreased time for the turn over of the material reserves and the decreased need for materials. One lev of goods has been serviced by 0.16 levs of material reserves, which is an increase of about two levs.

The short term debt to suppliers has increased and also both the number of days for the collection of the short term debts and for paying the short term debts. The ratio observed is that for one lev of receipts from clients, there are 0,83 levs of short-term debts to suppliers.

Generally, there is a tendency for the short term improvement of the financial situation of the companies and their liquidity has increased which mainly due to the good work of the management.