ECONOMIC GROWTH WILL BE BLOCKED BY COMPANIES' INDEBTEDNESS
Dr. Kamen Kolev, Director General of Industrial Development at the Bulgarian Industrial Association, to the BANKER weeklyMr. Kolev, the Bulgarian Industrial Association (BIA) announced that the liabilities of enterprises from real economy reached BGN34BN at end-2001. What is their structure and are the debts under the Act on the Settlement of Non-Performing Credits, Contracted prior to December 31st, 1990 (better known by its Bulgarian acronym ZUNK) included it this shockingly high figure?- Our research has been based on the National Statistics Institute (NSI) data from the balance sheets of enterprises from the non-financial sphere by December 31, 2001. At 20-25% growth of liabilities at end-2002 they'll probably reach BGN40BN. This figure reflects all the liabilities in the real sector, and about 75% of them are short-term debts. One fifth of them are interests on credits, ZUNK, and overdue liabilities. The largest share (36.6%) is accounted for by debts to suppliers. But if we speak about intercompany indebtedness, the liabilities to interrelated enterprises (another 13%), advance payments, and trade credits (2.5%), should be taken into account as well. Together with them the intercompany liabilities reach 60% of the aggregate indebtedness of enterprises, including the overdues to personnel, the budget, social insurance, and the banking sector. Which of these liabilities prompt the greatest worry?- Their aggregate amount is alraming. There are liabilities in all economies, but it's inadmissible for them to exceed 14% of the country's GDP. This means that the state should work for a whole year in order to pay off its firms' liabilities (excluding the government's and the banks' debts). The pace of its growth - 20-25% a year (exceeding several times the GDP) - is also alarming. A normally functioning economy would overcome this BGN34BN. But in this case there is a dangerous dependence in relation to GDP's growth, which would result in blocking the economy. The structure of these liabilities also shows an alarming tendency - most of them are intercompany debts due to the firms' inability to settle their mutual payments. The enterprises' short-term liabilities are 3/4 of the aggregate indebtedness. Liabilities to the National Insurance Institute (NII) are not drastically high, and indebtedness to the budget is 7.5%, which means that the fiscal discipline has been improved. The enterprises' indebtedness naturally causes their decapitalization. There is a chronic shortage of money, needed for economic growth. The firms also lack turnover capital, which makes it impossible for them to stay on the market (which is anyway limited). Even if an order is placed, such enterprises are not in a position to fulfill them due to lack of money. Therefore, we insist on crediting the real sector, although the indebted enterprises are the most unattractive as receivers of credits.Do you think that a law on intercompany indebtedness would have a positive effect?- One of the nine measures proposed by Deputy Premier Nikolay Vassilev, and aimed to rev up the economy, was to solve the problem regarding intercompany indebtedness. We know that a concept is being worked out by the Ministry of Economy, but it is not yet clear what is would contain - whether it will regard receivables or liabilities, how they would be transformed (by issuing bonds or in another way), what the volume of issued bonds would be, would they be traded on the exchange, etc... A law could eventually smooth down the problem (as was the case with the ZUNK), but it will in no way solve it. The government should rather attack the factors that influence indebtedness. The liabilities of BGN34BN have been accrued over the last four years. Inflation in 1996-1997 devaluated the enterprises' debts, but afterwards they increased again. That is why we believe that the decisions should not be directed to reducing the liabilities through transforming them or exchanging them by bonds. Of course, such measures could also have positive effect, but even if the liabilities are eliminated they will be accrued again in two or three years. And there is a danger, provoked by the state's direct participation in market relations.Do you see any way out of the dead-end?- In fact, there is no cardinal decision. A newly-established firm that is coming onto the market and is correct to the budget, to the NII, to suppliers and its personnel, will be also involved in that vicious circle when a client cannot pay it not because it is incorrect, but because another one has not paid to it. In order to stay on the market, the company will have to reschedule its receivables from suppliers, which will worsen their situation. Practically, the environment itself reproduces the liabilities. Therefore, we are convinced that the access to credits should be first liberalized. The firms need turnover capital in order to set their production in motion, fulfill their orders, and improve their possibilities for settlement of their payments. The amendments to the Code of Civil Procedures will play a positive role in expanding the volume and number of allocated loans. The other measure for pouring fresh resources in Bulgarian enterprises are the foreign greenfield investments. But the facilitated bankruptcy procedures, to be introduced by an amendment to the Commercial Code, is the most important thing. The sooner a bankrupt firm sells out its assets or adopts a rehabilitation programme on the decision of its creditors, the better for the entire chain of related enterprises. There are state-owned and private mastodons which have been bankrupt for a long time, but nevertheless they continue to stay on the market, accrue liabilities, and thus worsen the state of their partners.Is it possible to settle the things through preserving the ban for a reduction of debts to the state?- The liabilities to the state are 9-10% and represent an insignificant share in the aggregate indebtedness. But the state's role is important - it should become a first-class trade entity, which pays off its liabilities and collects its receivables. In many cases the state is both the biggest creditor and the biggest debtor of enterprises. But, on one hand it does not collect its receivables from dues, taxes and insurance installments, and on the other hand does not settle its liabilities to the municipalities or the Roads Agency, for example. Thus, willingly or not it participates in that vicious cicle.And what if the problem is not settled?- Then in the coming two, three, or five years, it will be aggravating and will result in blocking the economy and shrinkage of production, which will decrease the enterprises' possibility to be correct payers to the budget, social funds, and suppliers. We should not be expecting a collapse in the bank system (as that of 1996), but the shrinkage of production will lead to a decrease in the economic growth and non-fulfillment of the budget. And if the problem is handled, the current 4-5% growth of the GDP could increase to a double-digit figure, which would be necesary for Bulgaria's admission into the EU.