The Financial Crisis and Bulgaria

The first effects of the financial crisis become visible around 2 years ago. They were expressed by bank losses starting in the third quarter of 2007, and bonuses already decreasing in 2007 compared to 2006. The negative economic effects become visible in the second half of 2008 in the form of job losses and a huge change towards more debt and lower saving rates.
In Bulgaria everybody talks about the financial crisis and its negative effects, even though it is still not noticeable in the country. In September, last year people were still expecting from the government to take some actions in order to soften the crisis when it gets to the country, which is inevitable. One of the reasons is that over 80% of the banks in Bulgaria are owned by foreign bankers and another reason is the high prices and high investments in real estate. When the real estate prices start to plummet, it will have negative impacts on people who have used credit to invest as well as on the construction sector in Bulgaria.
In October 2008, Bulgaria’s foreign minister, Ivailo Kalfin, said in an interview that the financial turmoil will have real impact next year (2009) when the GDP growth will drop to 5% compared to 7% in 2008. The Bulgarian National Bank was increasing interest rates, while other nations affected by the crisis were decreasing them. In the beginning of 2007 the base rate was 3.43% and by December 2008, it reached almost 6%. At the moment some banks offer around 10% interest rate on savings accounts.
When 2009 started experts made predictions about the economic environment in the country and they were much different from what Mr. Kalfin has said. According to Standard & Poor’s, and quoted in Bloomberg, in 2009 Bulgaria will have a small economic growth of 1%. However, negative growth is also possible. And even though people have been talking about the financial crisis in Bulgaria for a whole year, 2009 will be the actual time when it will affect the country. The demand for Bulgarian goods and therefore exports will deteriorate, investments will decrease and the slowdown in the private income growth will cause the households’ consumption to drop.
The Bulgarian National Bank decreased the base interest rate from 5.17 in January this year to 3.49 in March. However, it will be some time until the commercial banks are affected and my personal opinion is that they will cause the crisis in Bulgaria to become more severe than it would have been if measures were taken earlier. There is a huge risk that Foreign Direct Investment and capital inflows could decrease sharply. A sudden slowdown could be avoided with tougher measures from the government to improve the business environment and sustain investor confidence. Hopefully, with election coming in July, we will see some adequate activity from the government.