LM Legal Services Blog

The maximal new foreign debt of Bulgaria in 2009 will be increased by 25% or 2.5 billion levs (about 1.2 billion Euros) according to the decision of the parliamentary budget and finance committee. The council of Ministers will not make any changes in the credit framework during the year as the loans and the beneficiaries have been already chosen. The largest loan is of 600 million Euros and it is for the construction of the nuclear power station Belene.

It is expected that the average price of properties in Sofia will drop by half. Six months ago the middle class apartment used to sell for 1300 Euros per sq.m., while now it sells for 1000 Euros per sq.m., but there are only a few buyers on the market. This trend suggests that within six months the prices will fall to 800 Euros per sq.m. At the moment this is the price for an off-plan property in the up-market Manastirski Livadi district.

The panic due to the global financial crisis, the outflow of foreign investors and the high mortgage interest rate by all means shall have a long term effect on the property market. It is expected that alongside the falling prices, the quality of the construction and of the finishing will increase due to the competition. Completely finished apartments are already on offer and it is expected that developers will come up with new customer orientated payment plans.

Thousands of newly finished apartments remain unsold in Sofia. Developers try to negotiate with potential buyers and offer different incentives only to sell their properties. Many of those who bought as investment try to sell their properties with a small profit or without a profit, just to get their money in cash. They even offer higher commissions to the estate agents in order to sell. The few buyers on the market tend to wait longer before making a purchase and expect to receive more for their money.

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.

Foreign investments in Bulgaria exceed 25 billions Euros for the last 12 years. The worst year was 1996 when the foreign investments barely reached 137 million Euros, while in 2007 they exceeded 6 billion Euros, according to the Bulgarian National Bank. Since 2002 there is a tendency of interrupted increase of the level of the annual foreign investments in the country. In 2003 and in 2006 the increase has been 90%. Only in the last two years the direct investments have reached 12 billions Euros.

The State
Bulgaria can repay its foreign debt according to the Bulgarian National Bank. The Bulgarian government has to pay 2,69 billion Euros to its foreign creditors. At the same time the fiscal reserve is 3,73 billion Euros. The foreign debt has decreased from 3,02 billion Euros to 2,69 billion Euros in March this year. The government has to repay the Euro bonds emitted in 2002, which amount to 1,6 billion Euros. The other debts are: 760 million Euros to the World Bank, 330 million Euros to the European Investment Bank and 17 million Euros to the European Bank for Reconstruction and Development.

Private Companies
The situation with the foreign debt of the Bulgarian private companies is different. In the end of April 2008 the debt was totaling 28.03 billion Euros – similar in size to the Bulgarian GDP for 2007. In four months this debt has increased by 2.97 billion Euros and the annual increase was 9.59 billion Euros. 10.7 billion Euros of this debt have been in the form of loans which foreign owners gave to their Bulgarian companies. These loans have been granted for the purchase of equipment and technologies, and subsequently, the official statistic considers them foreign investments. Unlike direct investments, these loans have to be repaid. It is not clear if these in-company loans have led to the accumulation of profit, sufficient enough for their repayment or the companies just sell their production and services for levs on the domestic market and then buy Euros to repay the loans.

The Banks
According to the Bulgarian National Bank, the foreign financing received by the Bulgarian banks by April 2008 has increase by 740 million Euros and has reached 6.49 billion Euros in total. The increase is the result of short-term deposits of foreign financial institutions at Bulgarian banks, rather than long-term credit lines.

The question is how long the country will be able to withstand the speedy increase of the foreign debts and whether this will lead to shrinking of the currency reserve.