LM Legal Services Blog

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.