BULGARIAN ECONOMIC TOP NEWS DIGEST
WEEKLY REPORT ( 16 - 23 JULY 2010 )
Sections/headline briefs:
MACROECONOMY:
· Bulgaria seeks BGN 18 M for ailing water sector
· Bulgaria seeks strategic partner for ailing railroads
· China tycoon Richard Li ready to invest in Bulgaria's Vivacom
· Top-level Japanese business delegation set for Bulgarian visit
· Bulgarian newly emerging health and wellness market
· Bulgaria, Austria sign bilateral double taxation agreement
· Bulgarian, Austrian prime ministers discuss relations, economic cooperation
- Bulgaria wants to be 1st operational link in Nabucco pipeline
INVESTMENTS:
· Bulgaria can attract more US investors
· Berlin mayor vows to help bring German investors to Sofia
COMPANIES:
· M-Tel adds Samsung Wave S8500 to portfolio
· Sweden's Tetra Pak sees Bulgaria's dairy packaging market growing 8%
- Reuters: EVN to get majority stake in Bulgaria hydro project
· Zara confirms Bulgarian expansion
THE CRISIS:
· Bulgaria and France: opportunities in crisis
· Bulgaria avoided banking crisis
ANALYSIS:
· Bulgaria: In the trap of macroeconomic mismanagement
· Bulgaria back on the road
MACROECONOMY:
Bulgaria seeks BGN 18 M for ailing water sector
Bulgaria’s water sector needs BGN 15-18 B to solve its problems as it remains one of the least reformed systems in the country, the environment minister has said.“The funds are needed for an upgrade in the water sewage system, the building and repair of the purifying stations, restoration of the system for drainage in the country, shoring up river beds,” Minister Nona Karadzhova said on Monday.According to the minister there are several options for financing, including the state budget, price hikes and concessions.“The best model will be picked though wide public debates,” the minister said.A strategy for the development and funding of the water sector is due to be drawn up and a contest is currently underway to pick its creator.More than twenty years after the fall of the communist regime, the water sector remains one of the most unreformed systems in Bulgaria.Except for Sofia municipal water supply, which has been granted on concession to a foreign investor, all other units in the sector are either owned by the state or the municipalities.The company in Sofia however has been harshly criticized for shortage of investments in the upgrade and maintenance of the system.An average 60% of water pumped in the pipes never reaches Sofia consumers, while in some regions losses account for up to 90 %.
Bulgaria seeks strategic partner for ailing railroads
Bulgaria will be seeking to attract a strategic partner to improve its ailing railroads, Prime Minister, Boyko Borisov, declared .Borisov, who is on an official trip to Vienna, Austria, made the announcement after meeting with Austrian Finance Minister, Josef Pröll, but declined offering further details. The two have discussed the state of the Bulgarian Railroad Company, BDZ, and financial support for it.The PM also informed the public tender for renovations of the railroad between the second largest city of Plovdiv and the Black Sea city of Burgas for BGN 400 M to be financed by the EU is pending. The tender was annulled once already over suspicions of violations of the procedure.Borisov further said in 10 days Bulgaria will begin negotiations for a loan from the World Bank for the State companies, BDZ, and Railroad Infrastructure.
China tycoon Richard Li ready to invest in Bulgaria's Vivacom
Chinese billionaire Richard Li, who controls Bulgaria telecommunication company Vivacom, is ready to invest Vivacom in a bid to restructure its debt, reports Hong Kong newspaper South China Morning Post.For the investment, Chinese telecom PCCW owned by Li would allegedly help out Li's troubled Pinebridge private equity fund."While PCCW and Pinebridge have no formal relationship beyond being companies controlled by Li, they plan to rescue Vivacom by jointly investing €180 million (HK.81 billion) in return for a 51 per cent stake," writes South China Morning Post.According to the edition the two Chinese companies have already had negotiations withVivacom's senior lenders Deutsche Bank and Royal Bank of Scotland.PCCW shareholders may question the logic of PCCW expanding into Bulgaria. Li has often talked of expanding his flagship media firm abroad, but has never mentioned Bulgaria as a key market.South China MP also writes that the investment might prove detrimental to the rest ofVivacom's creditors, who have proposed a competing bid to Deutsche Bank and RBS.Rumors that Li is going to invest in Vivacom – heir to the state Bulgarian Telecommunications Company (BTC) – first transpired beginning of July.Li, chairman of Asian telco PCCW, inherited control of Vivacom in March as part of the acquisition of AIG Investments, a unit of the troubled US insurance group which spans asset management and private equity investments. The unit was renamed Pinebridge Investments ahead of the takeover by Li's Pacific Century group.US insurance giant AIG bought 90% of the company's shares in August 2007 for EUR 1,4 B, later launching an offer to buy out the remaining shares.Vivacom dominates the fixed-line segment with 2.9 million phone lines, which accounts for 97% of the market, but it has been losing customers at an alarming rate in recent years, due to the spread of mobile communications and alternative telecoms in the country.
Top-level Japanese business delegation set for Bulgarian visit
The Bulgarian Chamber of Commerce and Industry (BCCI) is welcoming a delegation of Nippon Keidanren, the Japan Business Federation.On Friday, July 23, 2010, the BCCI is going to host a meeting of the 33-member Japanese delegation with representatives of Bulgarian business and employers’ organizations.The high-ranking Japanese business delegation includes the two Co-Chairmen of the Keidanren Committee on Europe - Yokoyama Shinichi, who is also Chairman of the Sumitomo Life Insurance company, and Kobayashi Yoshimitsu, who is also the Chairman of the Mitsubishi Chemical Holdings corporation.The visit of the Nippon Keidanren business delegation to Bulgaria is combined with visits to Romania and Slovakia, whose aim is to explore the possibilities for intensifying the commerical relations between Japan and the newest EU member states.The membership of the Japan Business Federation Nippon Keidanren includes 1,295 companies, 129 industrial associations, and 47 regional economic organizations.During their meeting with the Japanese investors, the Bulgarian business organizations are going to present the economic situation in the country and what they see as the potential mutually beneficial opportunities for joint projects.The program of the Japanese business delegation in Sofia also includes meetings with the Bulgarian Prime Minister, and the ministers of economy, energy and tourism, and of environment.
Bulgarian newly emerging health and wellness market
At first glance, Bulgaria may not seem like the most captivating of markets for health and wellness companies - per capita incomes are the lowest in the EU and the economy contracted by 5.1% in 2009 due to the effects of the global economic crisis, according to Euromonitor International.On the other hand, however, Bulgaria's consumer market developed significantly between 2004 and 2009. Consumer spending increased by a total of 16.7% in real terms during this period and per capita annual disposable income grew by 10.1% (also in real terms), reaching BGN 4,413 (US$3,137) in 2009.2009 was the only year during the review period when consumer spending actually declined, by 7.5% in real terms year-on-year. It is expected to start increasing again in 2010-2011 as the overall state of the economy improves and employment rises.When talking about the Bulgarian health and wellness market, yoghurt is the obvious starting point. Given its long history as a staple food, it is hardly surprising that plain spoonable yoghurt is a mass-market product in Bulgaria, consumed equally by both genders and all age groups.Euromonitor International packaged food data shows that Bulgaria has the second highest per capita consumption of plain spoonable yoghurt in the world; at 14.6kg in 2009 (Turkey leads with 23.7kg). Plain spoonable yoghurt, considered a supremely healthy and natural food by Bulgarians, accounted for 80% of the country's yoghurt value sales in 2009.Another sure sign that the health and wellness trend is starting to take root in Bulgaria can be seen in the oils and fats sector. Although this sector suffered a 7% value sales decline in recession-hit 2009, olive oil and functional spreadable oils and fats saw rather dynamic growth rates of 10% and 11%, respectively, making them by far the best performing categories.Over the review period, consumers switched increasingly from sunflower oil to olive oil in an effort to emulate the healthy Mediterranean diet and lifestyle. In functional spreads, Unilever dominates with a 90% value share, claimed by its Flora, Becel and Kaliakra Fibre brands. The category was only introduced in 2006, and had grown to BGN5.1 million (US$3.4 million) by 2009.Bulgaria has one of Europe's highest obesity rates. Euromonitor International countries and consumers data for 2009 shows that 19.4% of the country's population were classed as obese (with a BMI of or exceeding 30kg/m2) - worse than Germany (15.1%) and way ahead of its svelte northern neighbour Romania (9%).However, sales of slimming products are relatively low, amounting to just BGN17 million (US$12 million) in 2009. Sales of meal replacement slimming products are negligible. According to trade sources within the pharmaceutical industry, meal replacement products distributed through conventional retail chains is a marginal category compared with slimming medication, weight loss supplements and herb-based slimming products. Slimming products are advertised on television and in the press, often endorsed by celebrities, and benefit from prominent merchandising at the point of sale.In soft drinks, over the 2003-2008 review period, i.e. before the economic crisis hit, the impact of the health and wellness trend was largely apparent. Off-trade volume sales of carbonates, for instance, were not particularly dynamic, with a 6% compound annual growth rate (CAGR), and "unhealthy" concentrates declined by 5%, compared to 15% growth for bottled water, 13% for functional drinks, 10% for fruit/vegetable juice, 51% for ready-to-drink (RTD) tea and 19% for low-calorie carbonates.In the crisis year of 2009, the overall soft drinks market posted a decline of 2% in off-trade volume terms, with fruit/vegetable juice, bottled water and functional drinks also falling into negative growth. However, low-calorie carbonates continued their explosive performance seemingly undisturbed, clocking up an 18% volume gain, and RTD teas, which are perceived as a healthy, trendy option, increased by 15%.This shows that, despite the prevailing economic difficulties, Bulgarian consumers have not abandoned their search for healthier drinks, and it is reasonable to assume that once the recession fizzles out and financial constraints on grocery budgets lessen, Bulgarians will return to premium juices and functional drinks in their droves.
Bulgaria, Austria sign bilateral double taxation agreement
Bulgaria and Austria signed a bilateral double taxation agreement at the Ministry of Finance of Austria, FOCUS News Agency correspondent reports. Later on, Bulgarian Minister of Economy, Energy and Tourism Traycho Traykov and Austrian Finance Minister Josef Proel will sing an agreement on evasion of double taxation on property and income. The merchandise exchange between Bulgaria and Austria in 2009 is estimated at EUR 909.9 million, as the balance is negative for Bulgaria. Machines, iron products, engines, seeds and clothes predominate in Bulgaria's export to Austria, while the import list includes mainly electrical devices, medicines, cars, information equipment, meat and oil products, According to data of the Bulgarian central bank, in 1996-2009 Austria tops the chart of foreign investors in Bulgaria, pouring EUR 6.5 billion in the country, which makes 18.3% of the current foreign investments in Bulgaria. In 2009, Austrian investments in Bulgaria run to EUR 382.8 million, focused mainly in the field of electricity supply, telecommunications, energy, finance and trade. Around 10% of the biggest foreign investors in Bulgaria are Austrian.
Bulgarian, Austrian prime ministers discuss relations, economic cooperation
Bulgarian Prime Minister Boyko Borisov and Austrian Federal Chancellor Werner Faymann gave a news conference on Tuesday [20 July] at the end of Borisov's visit to Vienna.The two politicians discussed economic matters, participation in European projects and ways to expand bilateral economic cooperation. The conversation focused on the latest EU Report on Progress in Bulgaria under the Cooperation and Verification Mechanism, especially on Bulgaria's successes in the fight against corruption. Faymann praised Borisov for Bulgaria's progress in this fight, as well as for the successes of the judicial system and judicial reform.Faymann thanked for the invitation to visit Bulgaria, which he will probably do by the year's end. Until then Sofia will try to prepare a package of projects concerning infrastructure and energy, especially renewable energy sources, Borisov said.Borisov stressed his government's political will to fight corruption. He said that significantly, the Commission Report links the fight against corruption to Bulgaria's future admission to the Schengen area. He thanked the Austrian Chancellor and the interior minister for their assistance in the process of Bulgaria's joining of the Schengen Group.Borisov also elaborated on Bulgaria's role as a stability factor at a time of an economic downturn, citing as an example an upcoming joint meeting of the Bulgarian and the Greek Council of Ministers, similar to the annual meetings of the cabinets of Austria and Hungary.Earlier on Tuesday Borisov had a working breakfast hosted by the Austrian Vice-Chancellor and Minister of Finance Josef Proell at the Finance Ministry.After the talks Proell underscored that his desire is for Austria to retain its leading position as investor No 1 in Bulgaria. The sides discussed joint economic projects and boosting economic cooperation. Austria has committed to include Bulgaria in regional planning projects in 2012-2020. Austria has also offered its office in Brussels as a venue for presentations of Bulgarian projects and will lobby for them, Proell said. He emphasized the central role of the Danube Strategy as a development tool for the countries of the region in the future.Austria can be a strategic investor in all infrastructure projects, in the construction and modernization of Bulgaria's railway network, Borisov said.Proell and Bulgarian Minister of Economy, Energy and Tourism Traycho Traykov signed an agreement on the avoidance of double taxation of incomes and property between the two countries.On the second day of his visit, Borisov attended the dedication of the Bulgarian Embassy building.Trade between Bulgaria and Austria in 2009 stood at 909.9m euros, with a negative balance for Bulgaria. Machines, apparata, rolled steel goods, motors, seeds and clothing prevail in Bulgaria's exports to Austria, Traykov's ministry said. The list of imports is topped by electric appliances, medicines, motor vehicles, IT equipment, meat and petroleum products.According to data of the Bulgarian National Bank, in 1996-2009 Austria was No 1 investor in Bulgaria with investments totalling 6,500m euros, or 18.3 per cent of foreign direct investment in Bulgaria.In 2009 alone Austrian investments stood at 382.8m euros, mainly in electricity distribution, telecommunications, energy, finances and trade. Nearly 10 per cent of the largest foreign investors in Bulgaria are Austrian companies.
Bulgaria wants to be 1st operational link in Nabucco pipeline
The establishing of the Bulgaria-Turkey natural gas pipeline should become the first functioning part of the EU project for the Nabucco pipeline, believes Bulgaria’s Economy Minister Traikov.Traikov met Tuesday in Vienna with representatives of the senior management of theAustrian company OMV AG, which is one of the partners in the project, and with the CEO of the international project company Nabucco Gas Pipeline International, Reinhard Mitschek.The Bulgarian Minister of Economy, Energy, and Tourism is in Vienna as part of a delegation led by Bulgarian PM Boyko Borisov.In his talks with OMV and the Nabucco company, Traikov has suggested boosting the efforts to construct a natural gas pipeline connection between Bulgaria and Turkey, which can later become a part of the entire Nabucco pipeline.“The realization of this pipeline link will practically turn into a start of the project which is going to provide Bulgaria and the EU as a whole with an access to the gas resources of the Caspian Region and the Middle East,” Traikov said.The Austrian experts have presented to him the work of the Central European Gas Hub (CEGH), which is 80% owned by OMV, and discussed opportunities to set up a similar natural gas trade platform in Bulgaria.According to Traikov, Austrian experience will be very important to Bulgaria which is seeking to expand its own gas storage facilities.The Bulgarian Economy Minister has also met with the leaders of the Federation ofAustrian Industry with the talks focusing on Austrian investments as Austria is the largest foreign investor in Bulgaria in the last 15 years.“The bilateral dialogue has demonstrated that Bulgaria has the real opportunity to increase its weight in Europe thanks to its industrial potential at a time when Europe is increasingly being de-industrialized,” says the Bulgarian Economy Ministry in a statement.Earlier on Tuesday Traikov met with Austria’s Finance Minister Josef Proell; the two signed a double taxation agreement.
INVESTMENTS:
Bulgaria can attract more US investors
Bulgarian Industrial Association (BIA) Chairman Bozhidar Danev met with Bulgarian Ambassador to the US Elena Poptodorova ahead of the Ambassador's new term, the BIA said on Tuesday.Poptodorova expressed her desire to work on concrete matters concerning Bulgaria's trade relations with the US, which is the purpose of her contacts with the BIA Chairman as a representative of the Bulgarian business community. According to the Ambassador, the excellent political cooperation between the two countries provides a solid foundation to develop economic and trade ties.Danev said that US investment in Bulgaria has so far been concentrated in the energy industry and information technology, but there is much potential in industrial research and development and in high-value-added manufacture.The BIA Chairman specifically pointed to the existing potential in attracting US investors to the manufacture of products containing refined and unrefined copper. Bulgaria is second in the world in terms of output and export of copper materials, but imports copper conductors from India, for example, he said.The situation with sunflower is similar, Danev said. Bulgaria is among the leading producers and exporters of sunflower, but imports sunflower oil from Turkey. In this sense, a significant potential exists to attract investors in the cosmetics and pharmaceutical industries who use sunflower.Another potential field of development of bilateral business relations is the advent of US hedge funds on the Bulgarian market, as hedging is not practically used in Bulgaria for insurance against fluctuations of currency exchange rates or energy prices, the BIA said.The Bulgarian business community could also derive considerable benefit from more active exchange of information and practical experience in the field of corporate management, in which the US holds a leading position in terms of applying new approaches and techniques, the BIA said.Danev proposed hiring US consulting firms to identify the best way for Bulgaria to capitalize on its geographical location, and then attracting US investors to concrete economic spheres and activities.
Berlin mayor vows to help bring German investors to Sofia
Sofia Mayor Yordanka Fandakova has welcomed her Berlin counterpart Klaus Wowereit in the Bulgarian capital.Wowereit is on a two-day visit to Sofia, and he is scheduled to meet Bulgarian President Georgi Parvanov and Bulgarian Prime Minister Boyko Borisov on Thursday.The major topics of his conversations with Mayor Yordanka Fandakova had to do with spurring greater German investment in Sofia, and transferring knowledge to the Bulgarian capital about how to help the city attract more tourists.“Sofia has seen a lot of foreign investments but generally the German investors are not in the leading spots so we would like to attract more of them, and we have invited investors from Berlin to visit Sofia in the fall. We would also like to present the tourismopportunities that Sofia offers. There has also been a special topic that posed, and we will be relying on getting help from the Berlin Mayor’s Office on that – that is the German experience with respect to the repair of panel apartment buildings,” explained Fandakova referring to the apartment buildings constructed during the communist period in Bulgaria and in East Germany using the same technology.“Keeping in mind the good relations between the two nations, I think that Germany has to work more on investing in Bulgaria,” said in turn Klaus Wowereit referring to the joint initiative of bringing companies from Berlin to Sofia in the fall. He also did mention that Bulgarian investors would be welcome in the German capital.Wowereit welcomed a Bulgarian delegation in Berlin, including PM Borisov and Sofia Mayor Fandakova, in January 2010.
COMPANIES:
M-Tel adds Samsung Wave S8500 to portfolio
Bulgarian mobile operator M-Tel has started offering the Samsung Wave S8500 one week after launching the Samsung S Galaxy. The Samsung Wave S8500 smartphone runs on Samsung's Bada operating system, thanks to which customers have access to Samsung Apps, an online shop with free for download applications. The Samsung Wave S8500 offers a Super Amoled 3.3-inch display, five megapixel camera, 1GHz processor, a 'social hub' to bring users closer to contacts and connections, and the TouchWiz 3.0 intuitive customisable user interface. It is available for BGN 21.90 per month or the standard price of BGN 499 along with a Internet M-Tel Surf mobile internet plan or the M-Tel Surf&Talk tariff plans.
Sweden's Tetra Pak sees Bulgaria's dairy packaging market growing 8%
Swedish food packaging company Tetra Pak expects an increase by an average 8% per year of the total carton milk market in Bulgaria in the coming years, a company official said."In Bulgaria and Romania there are big volumes of loose (unpacked) milk - 68% of total white milk, which is a great potential for the packed food industry," Tetra Pak's Southeast Europe managing director, Lars Holmquist, told SeeNews in an emailed interview in June.Tetra Pak holds roughly half of the total packed milk and juice markets in Bulgaria. The company's local unit, Tetra Pak Bulgaria, was set up in 1995. Besides milk and juices, Tetra Pak packages also other dairy products like liquid cream and drinking yogurt, tomato products, wine, water, oil, soups and others.The company delivered more than 75 million packs on the Bulgarian market in 2009 and so far in 2010 it has exceeded last year's figures compared to same period of 2009."In Southeast Europe, the region of my responsibility, Tetra Pak is present in both big liquid product categories, which are milk and juice. The main milk and juice producers in Bulgaria are our customers," Holmquist said.Holmquist added the packaging industry was hit by the global recession due to its link to fast moving consumer goods but the market has already showed the first signs of recovery."At the end of 2009 Tetra Pak presented a stronger-than-expected growth and strong demand in some emerging markets balanced declining sales in regions affected by downturn," he said."The first signs of the first quarter of 2010 are very optimistic as well and I am happy to say that these are the first signs also for the SEE region."Tetra Pak (www.tetrapak.com) was set up in 1951 in Lund, Sweden. Its net sales totalled 8.955 billion euro in 2009 when it sold 145.030 million packages. The company, which has operations in close to 170 markets and employs over 21,000 people, has 42 production plants for packaging material and closure.In southeast Europe, the company has operations in Romania, Moldova, Greece and Cyprus. The company also operates in Israel.Applying all the latest technologies for food packaging and processing is among the company's major goals in the region, Holmquist said."Bulgaria is one of the key markets for us in the region. Therefore, we plan together with our customers to apply our most recent innovations, already in use in other European countries. on the other hand, we plan to participate in social programs like the School Milk Program and others."Another major goal of the company not only in the region, but worldwide is to develop products that make food safe with minimum impact on the environment."Our aim is to ensure that the overall performance of our products - from the choice of raw materials to the manner of their disposal - is continuously improved, without compromising on quality," Holmquist said.To achieve this goal Tetra Pak uses renewable materials for its packages and tracing systems to ensure the wood that is used is sourced responsibly.
Reuters: EVN to get majority stake in Bulgaria hydro project
Austrian utility EVN signed on Monday a deal with Bulgaria's state power utility NEK to take a majority stake in a 500-million-euro ($648.8 million) Bulgarian hydropower project, Reuters reports. NEK will hold the remaining 30 percent in the joint venture that plans to revive a long delayed project and build three hydropower stations and renovate existing dams on the Gorna Arda river near the border with Turkey. "We hope to have an updated feasibility study by the end of the year that will define the amount of the investment and launch the construction in 2011," an EVN spokesman told Reuters after the chief executives of the two companies signed the deal. The spokesman said the feasibility study will define the amount of EVN's investment for the project that Bulgarian government estimates to cost half a billion euros. The Austrian utility will get the stake after a capital increase of the joint venture company, in which EVN will put 1.39 million euros. The Gorna Arda project, with an expected capacity of 175 megawatts was part of an energy deal between Bulgaria and Turkey, signed in 1998. It was initially to be built by Turkish CCG, part of the Ceylan conglomerate. NEK had 70 percent in the joint venture. In May, EVN, which also controls power distribution in southeastern Bulgaria, bought the 30.1 percent stake of Turkish CCG. Cash-strapped Bulgaria has been looking for foreign investors to back its energy projects that will help it meet European Union targets to reduce greenhouse gas emissions and create new jobs.
Zara confirms Bulgarian expansion
Spanish company Inditex, parent company of Zara and the world's largest and most internationalised fashion retailer, announced its intent to open three more stores in Bulgaria this year.The store in the capital Sofia will be located on the fashion street Vitosha, but the location of the other two shops – in the Black Sea town of Burgas and Stara Zagora – was not immediately clear.The company however is known to have signed contracts for the opening of stores in the Gallery malls, which will also feature some of its other brands, such as Pull and Bear,Massimo Dutti and Bershka.Inditex has also announced plans of introducing its online offering for the brand Zara in selective markets such as UK, France and Spain.
THE CRISIS:
Bulgaria and France: opportunities in crisis
Despite Bulgaria's strong ties with France, business connections between the two countries have not been as visible as those in other areas, but that does not mean that there are none.
One of the more visible French investments in Bulgaria is in the banking sector, where Societe Generale Group bought in 1999 Varna-based Expressbank, a lender focusing at that time on corporate clients and, as such, largely unaffected by Bulgaria's banking crisis in 1996.An increased emphasis on lending to small and medium-sized companies (SMEs) followed, but the bank avoided going overboard during the credit boom years, sticking to its guns even if it meant sticking out among the competition.With the flow of cheap refinancing abruptly ending because of the credit crunch, the bank found itself in a position to explore opportunities other rivals could not, a state recognised by the banking industry earlier in July, when Societe Generale Expressbank was awarded the dynamic development award for 2009 by the Bulgarian Bank of the Year association."Loans and deposits are the most tangible proof of the growth of our business. This prize is more a recognition of structural trend, not only the achievements of 2009," Societe Generale Expressbank chief commercial officer and deputy chairperson of the board Bertrand Cozzarolo told The Sofia Echo.In 2009, the bank saw both its loans and deposit portfolios grow – credit lending increased by 11 per cent and deposits grew by 13 per cent, a trend that has continued this year. "We feel is that our brand and our image is quite strong and we have been able to attract deposits because everybody knows and perceives us as a very reliable partner," Cozzarolo says.The key factor has been the bank's unwavering approach to risk management, he says. "Our policies have not changed before and during the crisis, we've always been responsible bankers. We've only been lending to people who have a good project and can actually repay. We were not part of the euphoria that took place before, in 2007 and 2008.""We never stopped to lend, we were able and willing to lend last year and today people know that we are here. We can grow our exposure and grow our loan book and we feel that our brand is recognised that we can grow our deposits. It is a time of opportunity for us – of course we suffer like everybody else [because of the crisis], but maybe we are more able than others to pursue opportunities."With a strong deposit base and support from the Bulgarian Development Bank, Societe Generale Expressbank recently boosted its ability to continue lending by contracting a 75 million euro credit line from the European Investment Bank. The funds would be used to support micro-enterprises and SMEs and, despite relatively low demand on the market, could be disbursed to final recipients within a year, Cozzarolo says.Having completed its organisational transition to become an universal bank – Societe Generale Expressbank now offers financial markets, factoring, leasing and life insurance services, either directly or through subsidiaries – Cozzarolo says that the next step is improving the relationship with customers, without compromising the bank's commitment to proper risk management."We feel that we have a distinctive approach to the market, which might not have been fully recognised or appreciated a few years ago, when competition was so unbelievable that discipline was maybe somehow forgotten. We try to be very transparent because we believe that valuable relationships with clients are important in the long run. We feel that in the coming years, quality of products will make the real difference for clients and we are working on this to differentiate us from competition.one area where Societe Generale Expressbank has been less visible is mortgage loans, but that is its next target. "What we have done recently is lower interest rates on housing loans. Today we are able to provide relatively cheap credits, but we do not compromise on risk. We did not relax our risk criteria, but we have relaxed our terms and conditions, mainly the interest rate, but not only that, we've lowered the fees and charges to clients."More tangibly, the target is moving a couple of spots up and becoming one of the country's top seven banks by assets. What was previously seen as the bank's conservatism is its trump card during recession.We are proud to say that we stand by our clients in these difficult times and we are proud to continue lending," Cozzarolo says. "We have been consistent throughout the business cycle and the prize we got recently is a certain way of recognition of our attitude towards our clients. It is positive feedback from other banks that we are doing the right thing."
Bulgaria avoided banking crisis
The expectations of many international analysts for severe banking crisis in Bulgaria proved to be only speculations. The banking system managed to maintain the level of assets and no decline of credits was posted. In the same time, bad loans increased but cumulative bank profits exceeded provisions for losses. The increase of NPLs will likely continue and will have implications on the strategy for the development of the system. High interest rates supported the level of deposits and provided stable source of financing for banks. The growth of the banking sector will accelerate next year and we expect that it will return to the pre-crisis levels of growth in 2013-2014. However, the profitability of banks will be supported by the decline of interest rates on deposits and the slow expansion.The crisis only postponed the growth of assetsThe official end of the high growth period of the Bulgarian banking system could be attributed to September 2008. Over the past five years, assets have increased nearly five times. This growth contributed to the development of the economy and the boom in construction and investment activity. It is also one of the reasons for the increase in imports and consumption in the country. Banking services became important part of the above 5% annual growth of real GDP in Bulgaria.Cumulative assets of banks managed to exceed BGN 70 billion in December 2009 after 5 quarters of insignificant changes. The expectations that banks will begin to pay its short-term loans to foreign credit institutions proved to be exaggerated. Foreign-owned banks did not even bring up capital as dividend, which was due to the recommendations of the central bank to capitalize on local lending institutions.Monthly data also showed low volatility of assets since their peak. The recent monthly gains in December 2009 and February 2010 are accompanied by more active credit policy from the largest banks. It would not be surprise, if assets continue to rise over the next few quarters. However , we do not expect that monthly growth will be more than 1% for extended period and will likely remain well below the average for the period of 2003-2007.Banks are cautiously returning to credits. Commercial banks changed significantly their lending policies in 2008 when bad loans began to weight on their portfolios. The lack of experience in risky environment was the obvious reason for the dramatic change, despite the fact that Bulgarian economy performed very well in most of 2008. Tight credit standards will likely remain for the near future but banks are advertising credits and are looking for solvent clients more aggressively than six months ago.The growth of loans also lost momentum in 2008 as banks virtually ceased to lend. Despite the rising losses to their credit portfolio that have been inflicted by the cooling of the real estate's boom and the economic contraction, the total amount of credits did not declined. The recent initiatives of largest banks to increase credits have not yet produced sizable results.The loans set up 80% of the total assets of the banking system since December 2008 as compared to 67% in 2003. Commercial banks are focusing solely to credits and the low return of the traditional banking activities since 2008 did not force them to look for alternative investments. Loans jumped in the period September 2007 - July 2008 and then calmed down in accordance to the economic slowdown. Tight landing standards lead to severe decline of new credits last year along with the rising interest rates. Recently, the market conditions changed and the banks are more inclined to grant resources to corporate clients and individuals with low level of debts and good cash flows.Credits to corporate clients set up 54% of the total loans at the end of the last quarter . During the 1Q 2010 corporate loans decreased by 0.4%. The retail part of the banking business decreased by 0.3% - the increase of the residential mortgage loans by 0.6% could not compensate the decline of consumer loans. The rate of devaluation of costs increased along with the rising bad loans. The structure of loans was hardly changed during the last two years but significant differences can be found when comparing to the not-so-distant past of end-2003. Residential mortgage loans to individuals constituted only 3% of total banking credits. Consumer loans also had lower share - 14% as comparing to the current 16%. The share of loans to financial institutions changed the most from 21% to the current 13%. This trend continued since 2007 and is one of the reasons for the improved profitability of credit institutions in Bulgaria. Credits to corporate clients had even larger share in 2003 than the current 54 percent. They constituted to 58% of total loans but they followed the expansion of landing and their share is not declining since 2007. With the exception of consumer loans, the euro is the preferred currency for loans. The Currency Board is limiting the currency risks as Bulgarian Lev is fixed to the euro since the inception of the currency regime. Large credits are negotiated in euro for different reasons, including foreign trading and investments in machines and real estates. However , lower interest rates also contributed to the huge difference in the currency structure. Small consumer loans are used for domestic expenditures and are predominantly in leva.The table is showing the evolution of loans structure by currency during the p eriod of extensive growth of the banking system and the last period of relatively unchanged levels of credits. The significance of the euro is rising during both periods in all types of credits. However , in search of small interest rates banks offered credits in Swiss francs and other low interest rates currencies. This includes US dollar due to the aggressive monetary policy in USA since late 2008. These observations are leading to the conclusion that corporate and individual clients are looking for lower interest rates and are not concerned by the stability of the Currency Board in Bulgaria.Fixed assets are supporting the improved profitability. The expansion of the Bulgarian banking system is a result of deeper penetration of branches of almost all banks during the last decade. The sector grew faster than the economy, creating jobs and supporting the development of domestic construction, corporate investments and households' expenditures. The share of tangible and intangible assets declined during the last several years due to the larger scale of banking operations and improved competitiveness of the sector . However , banks prefer to rent offices instead of using their capital for acquiring real estates. Thus, data could underestimate the expansion in offices and branches but are confirmed by the growth of administration costs. Moreover , tangible assets increased 230% from end-2003 to end-2009. Administration costs posted lower growth as compared to tangible assets of banks and are lagging well behind the increase of total assets. They posted 134% growth from end-2003 to end-2009. Labor costs increased at higher rate of 160% for the period but are also well below the expansion of the banking system. Administration costs jumped in 2008 as banks continued the expansion of branches and increased the payments to employees as they competed for better workforce.Data for the administration costs and the insignificant change of tangible assets in 2009 are confirming the end of the expansion in the sector , along with the lack of growth of total assets. The banking sector will continue to grow faster than the economy as total assets are 107% of GDP. This figure is consistent to an emerging economy as assets of Western European banks exceed significantly their annual GDP.Deposits supported the growth of the banking system. Deposits jumped almost six times since 2003. They are the main reason for the expansion of the banking system as deposits-to-assets ratio increased from 0.74 to 0.84 from 2003 to 2007. Total deposits exceeded BGN 58 billion in March 2010 but are not returning to the level of growth from the first half of 2008. Moreover , we do not expect that the period of high grow to return during the next two years, as household income and corporate cash flows will recover slowly from the global economic crisis.
ANALYSIS:
Bulgaria: In the trap of macroeconomic mismanagement
Author: Anton Mihailo, Vienna Institute for International Economic Studies
The Bulgarian government has grossly mishandled the crisis thus prolonging and deepening the economic slump in the country. While most of Europe was turning the corner in the first quarter of 2010, Bulgaria’s GDP plunged by 3.6% year-on-year, making it one of the worst performing economies on the continent in this period. Given the openness of Bulgaria’s economy and its relatively healthy position before the crisis hit, the origins of this dismal outcome seem to be mostly of domestic nature. The crisis triggered a drastic macroeconomic adjustment away form the previous pattern of growth which was led by domestic demand. For 2009 as a whole, domestic absorption contracted by 14.4% (against a GDP decline by 5.0%) and in the first quarter of the year, domestic absorption plunged by a further 8.8%. At the same time exports started to recover already in the last months of 2009 and this continued in 2010: in the first quarter, real exports of goods and services (national accounts definition) grew by 7.6% year-onyear. While – given the large current account deficit – a switch towards more reliance on exportled growth was up to a point a needed macroeconomic correction, the disproportionate contraction in final domestic demand has to a great extent contributed to the bleak macroeconomic picture in the country. Thus despite the robust recovery in exports in the first quarter, the manufacturing industry remained in recession, with quarterly manufacturing sales dropping by 3% year-on-year. Construction was the worst affected sector with total construction output dropping by 26.7% in the first three months, after a 15.3% annual drop recorded in 2009. There was a slight surge in consumer price inflation in the first quarter but it was largely due to rises in administrative prices. In turn, the rise in producer prices mostly reflects price movement in international markets. Overall, there do not seem to be major inflationary pressures. During the crisis, the rate of unemployment rose from the low of 5.8% (recorded in August 2008) to 10.3 (in February 2010). However, it is widely believed that the peak of unemployment has been reached and that situation in the labour market will start improving. Final domestic demand (particularly fixed investment) was adversely affected by more difficult access to credit due to stringent screening by banks. Overall, credit activity generally remains stagnant but there has been no net withdrawal of funds by banks from the economy: the stock of credit to the non-government sector in March 2010 was 2.6% higher than a year earlier. Therefore more difficult access to credit can only explain part of the drop in domestic demand. The continuing sharp contraction in domestic demand and, in particular, in private consumption (real retail sales dropped by 12.3% in the first quarter after a decline by 8.9% in 2009 as a whole) is all the more surprising given the fact that wage incomes never stopped to grow through the crisis: real average monthly wages in 2009 increased by some 9% and continued to grow at roughly the same rate in the first quarter of 2010. Consequently, at the end of March 2010, the stock of total household deposits was by 13.4% higher than a year earlier. Overall, the continuing decline in final domestic demand seems to be driven by an ongoing sharp drop in confidence by both consumers and investors which affects negatively their behaviour. If one takes for granted that the currency board requires a fiscal balance (in a weaker formulation, this should hold over the cycle), the authorities have zero degree of freedom as regards the balance but do have room for manoeuvre as regards the composition of revenue and spending. A skilful restructuring of revenue and, especially, spending in times of crisis can in principle produce a robust countercyclical effect. However, it is in this territory that the government produced a series of blunders by introducing measures which were counterproductive as regards their declared fiscal goals, turned out to be procyclical (rather than countercyclical) and ultimately affected negatively the overall fiscal balance. The fact is that since taking office in July 2009, the government has never come up with a coherent strategy and polices of dealing with the crisis. The only explicitly stated policy objective – fast entry into ERM2 – was obviously unrealistic and was announced at the wrong time, especially in view of the collateral damage of the Greek debt crisis. Fiscal policy in this period has translated into a series of hectic and inconsistent measures, which more often than not led to wasteful outcomes. Probably the most damaging – and procyclical – fiscal step has been the curbing of public investment which started in mid- 2009 and continued in 2010 as well (in the first quarter, public investment expenditure financed from local sources was 8% below the level of the same period of 2009). Another irrational step has been the withholding of payments due from the budget, especially to firms involved in public procurement, in a misguided attempt to curtail the cash fiscal deficit (which is an irrelevant measure in the context of ESA’95). The substitution of policy stimulus with cash austerity resulted in overcooling of the economy: these steps did next to nothing in terms of the overall fiscal position but had a damaging effect on economic activity and investor confidence. At the same time, the initially declared policy of fiscal stringency was de facto abandoned in 2010 and degenerated into lavish populist spending in spheres with no countercyclical effect. Fearing a loss of popular support, the government has put on hold the envisaged reforms in the health care and pension systems as well as in education, prolonging wasteful public spending in these areas. There was no attempt (as of May 2010) to curb the growth of wages which notably outpaced productivity growth during the crisis. But probably it is policy incoherence itself and the ever changing policy signals and measures that have had the most damaging effect on investor and consumer confidence. The absence of a clear policy direction and the unpredictability of the economic environment have translated into growing precautionary savings rather than spending, prolonging the current economic slump. These detrimental developments also act as further deterrent to FDI, amplifying the negative effects of the crisis. Coupled with the withdrawal of policy stimulus and the discontinuation of public investment projects, this led to erosion of the tax base by margins that exceeded by far the drop of output. The aggregate fiscal outcomes in the first quarter of 2010 were disastrous. Compared to the same period of the previous year, consolidated general government revenue dropped by 19.2%, a disproportionate plunge vis-à-vis the fall in GDP. The main factor behind this was the sharp fall in tax revenue, largely due to an eroding tax base and poor tax collection. At the same time public expenditure ballooned by 17.0% (despite the cuts in public investment), an obviously unsustainable expansion even if the economy were growing. As a result, the overall fiscal balance for this quarter was a staggering negative 12% of GDP. There was also one farcical development in this period. When the government reported ESA’95 fiscal balance for 2009, the deficit was unexpectedly downgraded from the initial estimate of 1.9% to 3.9%. No explication of this revision was given and some analysts have suggested that, faced with the prospect of a large deficit in 2010, the government might have over-reported in the 2009 accrual balance some committed long-term spending which will be due in 2010, so that to shift the responsibility to the previous government. The irony is that as a result of this reported 2009 deficit number, which exceeds the Maastricht threshold, the European Commission has invoked an excessive budget deficit procedure against Bulgaria, despite the harsh cash austerity measures undertaken in 2009. At present the government is contemplating a major revision of the budget for 2010 with a view to reversing the negative trends, mostly by spending cuts. However, for the time being the economy remains in a largely self-inflicted vicious circle of an economic downswing and a swelling fiscal imbalance. If macroeconomic mismanagement continues, a further deterioration of the situation cannot be excluded. The short-term outlook for the Bulgarian economy remains skewed towards the downside. The continuing slump in domestic demand seems to outweigh the recovery in exports and as long as this will be the case, one could not possibly expect a recovery in aggregate output. Even if there will be a change towards a more supportive policy stance, the negatives already accumulated in the first months of the year would pool back the outcome for GDP growth in 2010 as a whole. In the years after, the re-orientation towards an exportled model of growth should continue but this would not be sufficient to achieve high rates of GDP expansion. As long as domestic demand remains subdued, no major resurgence of inflation can be expected. The one positive outcome of the crisis has been the notable reduction in the current account deficit; the latter can be expected to remain in the lower range in the foreseeable future.
Bulgaria back on the road
Publication: Bne Media Ltd.
Author: Andrew MacDowall in Sofia
After years of hold-ups, Bulgaria's vital motorway construction programme appears to be flowing once again. Anyone who has travelled on one of Bulgaria's major cross-country roads will be aware of the importance of the country's position on transcontinental transportation and trade routes, as well as the need for the highways themselves to be improved. Trucks from Turkey heading west are ubiquitous, and those from a wide range of farther-flung countries are also common. As the economies of Central and Eastern Europe and the Middle East have experienced rapid growth in recent years, volumes have risen. However, sweeping six- or four-lane motorways become two-lane affairs with little warning, with major HGV routes passing through the centres of bucolic villages or becoming trapped in suburban bottlenecks. Meanwhile, surfaces are inconsistent - much improved on some stretches, terrible on others. The variance in quality along what are actually single continuous roads is due to the incomplete nature of Bulgaria's infrastructure investment programme, which, for all its high ambitions, has been hamstrung by political disputes, corruption, funding shortages and material price volatility. In January 2008, for example, the EU suspended much-needed payments to the Bulgarian National Road Infrastructure Fund after allegations of graft. The patchy progress in such a vital area is perhaps indicative of Bulgaria's struggle to realise its economic potential.
Nexus
Bulgaria lies on four of the 10 Pan-European transport corridors identified by the EU as crucial transcontinental links needing substantial investment to enhance Europe's transportation infrastructure. While one, along the Danube, is largely a water-borne transit route, the three others are overland routes which cross the country, occasionally intersecting and coinciding. Corridor IV runs from Central Europe through Romania to Istanbul and Thessaloniki, with the branches dividing at Sofia. Corridor VIII is an east-west route across the Balkans from Constanta on Romania's Black Sea cost to Durres on the Adriatic in Albania. Corridor IX, meanwhile, runs from Helsinki to Alexandropoulos on Greece's Aegean coast, cutting north-south across the heart of Bulgaria from the Danube port of Ruse.These are far more than just theoretical lines on bureaucrats' maps. They reflect not only the recent growth of inter- and intra-continental trade, with the rise of the Middle East and emerging Europe, but age-old patterns of commerce and natural transport routes; corridor VIII, for example, broadly follows the Roman Via Egnatia. They also follow key proposed energy transit lines; the path of Corridor VIII is similar to that of the Ambo oil pipeline and IV that of the Nabucco gas pipeline. Finally, in a region that has had regular outbreaks of conflict over the past two centuries, the corridors are also strategically important for defence purposes.The development of major roads is important both for these regional reasons and to stimulate and support Bulgaria's economic growth. Its transportation infrastructure lags behind that of most other EU members, and it has not been able to capitalise on its position as much as it should have done. Now it appears that momentum behind the motorway-building programme is being restored. The centre-right government headed by Boiko Borisov, elected last summer, has pledged to complete the Trakiya, Maritsa and Lyulin motorways by the end of its term in 2013, and make substantial progress on the Struma and Black Sea motorways. Perhaps the most publicised of Bulgaria's troubled major road projects is the Trakiya Motorway. The route of the motorway runs from Kalotina on the Serbian border to Burgas, the country's second-largest port city, on the Black Sea, passing close to Sofia and Plovdiv, nominally the country's second city (often it is reported as running from Sofia to Burgas, but the Kalotina link will also be important). It is one of the more complete of the motorways, but it was held up in 2005-2006 by a dispute with the Portuguese contractor and has remained unfinished despite this being the main route from the capital to the country's main tourist area. The June tender for the construction of a 47.7-km stretch of the motorway, between Yambol and Karnobat in the east-centre of the route, attracted 13 bids, with Bulgaria's Holding Roads placing the lowest at BGN175m (89.45). The same month, Greek outfit Aktor was ranked top bidder for the construction of the 35.7-km link between Nova Zagora and Yambol. In February, Unified Highway Trace, another Bulgarian firm, won the tender for a 32-km section between Stara Zagora and Nova Zagora with a BGN137.86m bid. Work is expected to start by August, and once these sections are complete, the main Sofia-Burgas stretch of the Trakiya, following Corridor VIII, will be complete. The government has also announced that another 31 km of the Maritsa motorway, between Novo Selo and Lyubimets, will be complete by year-end. The Maritsa route runs from an interchange with the Trakiya at the village of Orizovo to the Turkish border at Kapitan Andreevo, where it links to the Turkish Avrupa Otoyolu (Europe Motorway) to Istanbul, making part of Corridor IV. only 38 km of 117 km has been completed thus far, but Bulgarian Regional Development Minister Rosen Plevneliev has said that a central 67 km stretch from Orizovo to Harmanli will be finished by June 2013, finally linking Istanbul with Sofia and other major Bulgarian cities with an unbroken European-grade motorway.
Plevneliev has also faced down vocal opposition for a substantial cash injection for the Lyulin motorway project, which will link the western outskirts of Sofia to the nascent Struma motorway (Sofia-Greece) near the industrial city of Pernik, bypassing a notorious bottleneck at Vladaya. The project, like the Trakiya, has been hobbled by long and controversial delays, with Turkish contractor Mapa Cengiz demanding a huge price hike from an original bid of 138m to 215m for the 19-km road. A compromise total of 181m was eventually arrived at, with the Bulgarian government agreeing to stump up an additional BGN86m in June. At a time when Bulgaria is paring back its budget and under pressure to make further cuts, this has aroused some controversy, despite the expectation that much of the cost can be met by EU funds. Attempting to cool criticism, Plevneliev has stated that the motorway is "62% ready" despite only 5 km being fully complete after significant progress this year, and parliament has set a deadline of May 2011 for completion.
Foot on the pedal
Despite the worsening fiscal situation, with the European Commission demanding that Bulgaria cut its deficit from 3.8% this year to 3% in 2011, some analysts argue that pushing ahead with infrastructure projects should be an absolute priority for the country, as it can help both stimulate growth in the short term and support it in the future. "Targeted investment in infrastructure represents a virtuous form of government stimulus," Paulius Kuncinas, regional editor for Eastern Europe and Asia at publishing and consultancy firm Oxford Business Group, tells bne. "While we are all aware of fiscal constraints facing EU nations, the lack of public investment could undermine a country's competitiveness and growth potential. It is, therefore, encouraging that Bulgaria is trying to balance austerity with selective investment in infrastructure that in fact has an economic multiplier." But even if the Trakiya, Maritsa, and Lyulin projects are completed on time and given the past, that should by no means be seen as a certainty it won't be the end of the story. The Hemus motorway, which should run from Sofia to the growing port of Varna on the Black Sea, and the Struma, are still far from completion. And it appears the government has decided not to prioritise them, at least for the next year, and perhaps for this parliamentary term (though rehabilitation of finished stretches of both is ongoing). A change of government in 2013 - or even before - could once again hold up progress. But after some difficult years, a concrete commitment to vital road infrastructure is at least an encouraging sign.