• In 2012 loan growth will stabilize at around 11% annual average

In their latest report on the development of the banking sector in Bulgaria economists with UniCredit Bulbank forecast stabilization and slow increase of loans at the year-end and at the beginning of 2011. The loan growth will be sustained by the recovery of export-oriented production companies and by additional signals about real estate prices.

Growth – moderate and consistent

The loan growth will continue to accelerate in 2010 and become stable at around 11% annual average during the period afterwards, indicate UniCredit Bulbank analysts. (see Graphic No1)

For comparison, at the end of March the total loans to households and companies slowed down to 2.7% on an annual basis and even registered a contraction of 0.5% in comparison to the end of 2009.

“It is yet early to talk about a reverse of the trend over the last several months, but we think that soon the worst with regard to the diminished loan growth will be behind us”, thinks Kristophor Pavlov, a Chief Economist with UniCredit Bulbank. In his opinion, the anemic loan growth at present reflects mainly the lack of appetite for new loans.

“Forecasting the pace of loan growth over the next years boils down mainly to forecasting the consumer expenses of the households and the investment expenses of the companies which are the main determinants of loan demand”, summarizes Pavlov.

According to the UniCredit’s economic team even once the crisis is overcome, the loan growth levels will not recover their counterpart values from the years of the economic boom. The latter will reflect the change in the economic growth model based on easy and cheap access to external financing.

The forecast of UniCredit Bulbank is that in the context of the ‘catching-up’ process the growth model of the region will continue to feature external financing but its flow will moderate.

For comparison, despite the continuing process of contracting the external indebtedness, at the end of 2009 the foreign liabilities of banks in Central and Eastern Europe stood at EUR 377 billion, or 17% of the total liabilities on a consolidated basis.

The dependence on external financing is highest in the Baltic countries, South-East Europe and the former Soviet republics. For Bulgaria, the foreign liabilities of the banks amounted to EUR 8.8 billion, or 23% of the total liabilities at the end of 2009. (see Graphic No2)

For that reason, the forecasts of UniCredit for Bulgaria with regard to the loan-to-deposit ratio reflect an expected but moderate rise – from 124% in 2009 to 126% in 2015. (see Graphic No3)

Growth in deposits – decreasing due to alternative savings options

As a response to the reduced flow of external financing the banks will need to tie their future loan growth to a larger extent with deposits attracted from Bulgarian households and companies. “Our forecast is that after the crisis is through (2012-2015) the annual growth of deposits against the GDP will be an average of 6.5%”, indicates the report. (see Graphic No4)

For comparison, during the period of the economic boom from 2003 to 2008 the average annual growth of deposits of residents against the GDP stood at 14.1%. The slowdown of the growth of deposits attracted from residents will come as a result of: normalized rate of income increase, the lack of certain factors specific for periods of economic boom, enhanced appetite of households for alternative savings options and the accumulation of wealth, indicates the analysis of UniCredit Bulbank.

A new growth model

„The downturn trend in the flow of external financing and the pressure to reduce indebtedness triggered by the global crisis will lead to a considerable change in the growth model of the Bulgarian economy. The volatile growth model during the boom years when the economy spent more than was produced at the expense of an increase in foreign debt will be replaced with a more balanced and, respectively, more sustainable growth model in which all components of end demand will contribute positively to the GDP growth”, thinks Kristophor Pavlov. (see Graphic No5)

It is evident from the graph that net export will also have a positive, yet limited, contribution to GDP growth in contrast to the years of the economic boom. This means that the positive boost to growth will decrease and, respectively, the growth of its two main components – investment and consumer expenses will also slow down.

The economists of UniCredit Bulbank forecast that during the years after the crisis domestic demand will increase by an average of 4.5% p.a., in contrast to an average annual growth of 15.2% during the years of the economic boom. (see Graphic No6)

It is only logical that the recovery of domestic demand to its levels before the crisis will be a prolonged process. According to the main scenario of UniCredit Bulbank, domestic demand will bounce back in full and the values from 2008 will be reached again in 2017, i.e. for eight years. In this sense, consumer expenses of households will recover fully and reach their levels from before the crisis in 2015, i.e. for six years, whereas the full recovery of investment – calculated on the basis of gross generation of capital – will require more time and will conclude in 2019, i.e. 10 years after the onset of the crisis.

„Since the growth of the consumer expenses and the investment expenses of the companies are the main factors underlying loan demand, it can be concluded that the change in the economic growth model will result in stable loan demand at lower levels. In this way, during the post-crisis years the weaker loan demand will be the main challenge to which banks in Bulgaria will have to adjust”, concludes Pavlov.