Банкеръ Weekly

Briefs

DEPOSIT YOUR MONEY IN BULGARIAN LEVS

Krassimir Katev, Adviser to the Minister of Finance, to the BANKER weekly:Mr. Katev, how do you think will the US dollar/euro exchange rate move? Is it possible for the dollar to start growing expensive after staying close to its record low levels for several months?- Right now (the interview was taken on December 2) the dollar trades at 1.30-1.33 per euro and analysts calculate that an additional devaluation of up to 5% is also possible. However, the capital markets usually show the opposite reaction, so I suppose the dollar may strengthen its position by 5 to 6% temporarily. If these trends continue in the mid-term - for six to twelve months, the dollar will probably remain at its current levels or may even go cheaper - by 6 per cent.How do all these processes reflect on the Bulgarian economy?- Leading analysts share the opinion that our economy is relatively protected against significant exchange rate fluctuations. The dollar weakness has contradictory effects that neutralize each other. The weak dollar is not dangerous for us mainly because it partially neutralizes the high rates of fuels and power suppliers. Imports from dollar destinations are getting cheaper, too, and that is favourable considering the inflation rate. If oil prices stay at their current levels, we may see inflation in Bulgaria slow down to some 4% throughout 2005. What will be the effect on the export-oriented branches?- About 65-70% of our exports go directly to the euro zone or to the newly-integrated countries which are linked to the euro, too. So we are relatively protected in this respect.Logically, this is bad for those who export to dollar destinations. There are many problems in the textile industry, as well as in some of the chemical enterprises. But as a whole the Bulgarian economy is doing well. Despite the dollar devaluation trend registered in the past year and a half, the economic growth, the investment activity and the production are reporting a 12 to 15% growth.The effect on the gross domestic product (GDP) as a whole is neutral, too. Interest and depreciation dollar payments are affected favourably.Does the budget lose or profit from the low dollar?- If we consider the current USD/BGN ratio which is about 1.48-1.49 and compare it to the 2005 budget forecast which is almost 8 to 9% higher (1.62-1.65), the effect on the debt payments interest expenses will be positive. About 35-40% of the foreign public debt is still denominated in dollars, while the reserve is mainly in euro. This automatically means that it is profitable to pay off a dollar-denominated debt. I have calculated that if the current dollar rate remains stable, savings will amount to BGN25-30MN because of the exchange effect.Moreover, the weak dollar has a positive effect on the debt to the GDP ratio. The ratio is expected to fall down to 35-36% by the end of next year. These levels are twice lower than those registered in 2001 when the debt to GDP ratio was about 74 per cent.What is happening to the people's savings and companies' turnovers in a situation of this kind?- I would recommend that both individuals and companies avoid speculations and stick to the currency of their main business. I would advise the savers to keep their deposits in Bulgarian levs because of the interest differential which is 2.5 to 4% higher than the one for euro deposits. Besides, this is a kind of natural insurance against sudden changes in the US dollar exchange rate. It is not by chance that crediting in euro has been growing more active lately. Euro credits hide the smallest exchange risk. Banks are reporting mortgage crediting boom. How do you expect the national mortgage market to develop?- We can expect more competitive interests and longer mortgages. It is already normal to speak about a 20-year mortgage in Bulgaria. Besides, mortgages will be mainly in euro and that is normal, too, since the property market has turned to prices in euro in the past year and a half. What is your recommendation to people who keep their savings in US dollars? Are changes in the US dollar exchange rate possible?- I would advise them to wait for a while. Most probably the dollar will grow expensive by 5-6% in the next six months, so they will be able to transform their savings in levs. If they have two, three or even four years, they'd better do nothing. I think a parity between the two currencies will be possible then.Is that because the currencies of the world economies are like communicating vessels...?- That's right. They also move in three- to five-year cycles usually. The dollar weakening cycle started in the middle of 2002, so it will normally go on by the end of 2005. According to the forecasts, there will be a longer period during which the dollar will be returning to the positions it held four years ago. This is important for Bulgaria, too. The exchanges of the debt from dollars in euro undertaken by the Ministry of Finance are subject to critics periodically. Still, the facts are different. There is hardly a person who would dare predict the maturity of the dollar bonds in 2015. Therefore, the reduction of the currency risk makes the budget management more predictable. Moreover, it stipulates smaller interest expenses which means more money for the other budget spheres. Exchanges were made permanently and during the ruling of different governments. Payments exceeding USD2BN have been made from the beginning of 2000 to the middle of 2001, because over 65% of the debt has been denominated in dollars. The payments have been carried out through converting euro and levs from the fiscal reserve. But the average dollar rate at that time was lower than the rate at which the exchanges had been made.Do you mean to say the management of debt was bad?- I am not trying to find fault, but it is clear that we made the logical moves concerning the economy which is orientated to the euro, and in fact inherited a huge debt in US dollars. The evaluations of rating agencies show that our policy was right. But this becomes most evident from the evaluation of the market. Government debt securities currently have a 10-year maturity and an interest surplus of 0.7-0.8% above that of the European or American paper, while in mid-2001 that surplus was ten times higher - about 7-7.5 per cent. Therefore, the argument about the management of the debt seems pointless. That is also evident from the trust of foreign investors. What is your forecast for the development of the real estate market in the country?- This is an issue on which many speculations have been made lately. The reason is that Bulgarians are quite attached to their property. Moreover, no developed capital markets exists in the country where free savings could be invested. Increased interest on the part of big foreign funds and Bulgarian emigrants has been observed over the last six or seven months. That is why the price increase of real estates is explainable to a certain extent. What should be expert from now on?- I am not enthusiastic about the prospect of real estate prices rising at the same rates as until now. I do not deny there will be an increase. But according to my unpresuming forecast, that will be happening much more slowly and selectively. Prices will most probably rise by 5-7% over the next year and a half. I would not be surprised if after Bulgaria joins the EU a period of stagnation and even a price decrease follows. But as you know in the real estate sector everything is a matter of location. Some flats downtown Sofia may be sold at EUR1,000-1,200/sq. m. But I do not see any reason for average prices of real estates in Sofia to go up as they are in the range of EUR700/sq. m, i.e. as much as in Budapest. There is oversupply on the market, mostly due to the difference between the construction and selling price of real estates. What effects do you expect as a result of that?- The oversupply of real estates could play a tricky joke to some entrepreneurs. They undertake too many projects, which heralds liquidity problems in the future. Therefore, one should be very careful. The other problem is that rents are quite low. And they are in fact an indicator of the economic activity, business demand and nominal expression of incomes. We began from the level of 12-15%, and in certain cases of 18% yield from rent compared to the price of a flat. Currently, that indicator does not exceed 5-7 per cent. This is a very serious warning sign about the end of speculations with real estate prices. How do things stand regarding the prices of agricultural land?- There might be a potential for a price increase there, which renders this issue quite interesting. But we should not be concerned only with buying or selling land. Investment thinking presupposes consolidation and cultivation of land. The State should also play its role and be active in that process.

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