Банкеръ Weekly

Briefs

PRIVATE FIRMS' EXTERNAL DEBT GOES UP AT BREAKNECK SPEED

Bulgaria does not draw new big credits from abroad, pays off its old liabilities before term, and nevertheless its gross external debt increases. At that - not by 100 or 200 million, but by EUR1.5BN. BNB's statistics show that the gross external debt rose from EUR10.87BN to EUR12.38BN in 2004, although EUR2.3BN of it was paid back last year - EUR2BN in principal and EUR300,000 in interest. BNB's data show that new loans of EUR3.8BN (BGN7.4BN) came into Bulgaria in 2004. The amount is shockingly huge. Especially if one knows that iy is almost equal to the tax proceeds of BGN7.6BN, projected in the 2004 republican budget. The big surprise in this case is that the new credits from abroad are not intended for the State, but for the private sector, and more specifically for the trade companies. Impartial figures show that Bulgaria received a total of EUR520MN in credits from abroad in 2004 and paid back EUR1.3BN to foreign creditors. At the same time, private companies received about EUR3.1BN and repaid BGN1BN in principal and interest.The final result of these payments was that the State's foreign debt decreased from EUR7.2BN to EUR6.4BN in 2004, while that of the private sector rose from EUR3.7BN to EUR5.96BN. Of course, nobody should be under the delusion that any Bulgaria firm could walk into the German Deutsche Bank or the Swiss UBS and draw a loan. It is important to specify that the aggregate amount of the private sector liabilities includes also the credit lines which Bulgarian banks receive from foreign credit institutions, the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the European Investment Fund (EIF), and the Bank for Development with the European Council (BDEC). In March 2004, for example, Raiffeisenbank (Bulgaria) got a EUR20MN credit line from the BDEC, used to extend loans to small and medium-sized enterprises. Three months later, the EBRD allowed a credit line of EUR6MN for HEBROSBANK, intended to finance small and medium-sized business again. BNB's statistics report as a foreign debt also the so-called internal company loans - when foreign investors extend loans to their subsidiaries in Bulgaria. There is also another possibility - Bulgarian firms to allocate loans to offshore companies, which will use the money for crediting Bulgarian companies. They immediately go into BNB's statistics as a foreign debt. Direct credits from abroadare for the time being a privilege to big domestic companies alone, at that those with foreign owners. As an example we could point to the deal in June for the purchase of 100% of MobilTel's shares. A consortium of foreign investors set up the Bidco firm which borrowed EUR700MN from foreign banks and paid with it part of the agreed purchase price of EUR1.2BN. A month prior that deal the privatized Bulgarian Telecommunications Company (BTC) got a loan of EUR128MN from a consortium of foreign banks. Thus, just two deals account for an increase of the domestic private sector's foreign debt by almost EUR830MN.Some would probably ask what is bad about companies and banks drawing credits from abroad and accruing foreign debts. After all, that is one of the ways for new technologies to enter into the Bulgarian economy and render it more competitive. At first glance, it is not the companies' liabilities, but the State's debt which matters to the citizens, as a considerable part of the taxpayers' money go for its repayment. But this is just on the face of it. It is not by chance that the International Monetary Fund (IMF) monitors Bulgaria's gross external debt and not the State's one. The reason is that forex goes out of the country for servicing liabilities abroad - no matter if private or those of the State, and this leads to worsening the country's payment balance. In turn, that affects adversely the stability of the currency board arrangement. Financing the private sector from abroadhas leaped since 2002. Three years ago the aggregate amount of foreign credits, received by our banks and private companies totalled EUR818.2MN, reaching EUR1.2BN in the end of 2003 and exceeding EUR3.1BN in 2004. At that, most of the financing - EUR1.9BN - has been directed to trade companies. The good thing about that is that the bulk of that sum was given in the form of internal company credits. These are usually long-term investment loans, launched at maximally advantageous terms for the borrowers. According to BNB's statistics, the average interest paid on them in 2004 was 3.7% for loans in euro and 2.7% for loans in US dollars. And the average repayment period is five years. BNB's figures show that in 2004 private firms accrued EUR1.2BN in new debtsto foreign banks and companies, with which they are not connected persons in the meaning of the law. A year earlier that amount was only EUR327MN, and in 2002 it was EUR282MN. The total amount of the debt accrued by the end-of 2004 was EUR2.9BN. The disagreeable thing about it is that a big part of it - EUR1.2BN - was short-term: EUR494MN were loans for turnover capital and EUR736MN were liabilities under rescheduled payments to foreign clients and suppliers. An interesting tendency is that within two years Bulgarian firms have started borrowing more turnover capital from abroad and have cut down by half the size of rescheduled settlements with their foreign partners. Anyway, the big share of domestic firms' short-term debts makes them quite vulnerable to an eventual crisis on international financial markets. If they want to be stable partners to foreigners, Bulgarian companies should increase the share of long-term financing they use. That will cut down annual expenses for servicing their external liabilities and will ensure them more turnover capital for covering their operational costs. Short-term external liabilitiesare the banking sector's hidden wound. Some time ago BNB experts warned that an upward tendency was observed in the short-term deposits from abroad, used by banks for extending loans. The experts from BNB's Bank Supervision department fear that an eventual deterioration of the situation on international markets could be followed by immediate drawing of these deposits from the banks, which would result in serious difficulties for the credit institutions. Central bank's data confirm the apprehensions of its experts. In end-2004 short-term debts of local banks amounted to EUR1.15BN, while a year earlier they were just EUR505MN, and EUR311MN in 2002.Foreign analysts believe thatin 2005 the external liabilitiesof private companies in Bulgaria will steeply rise. According to them, the reasons for the increased interest toward external financing originate from the restrictions, to be imposed on domestic commercial banks as of April 1, 2005. According to BNB's regulations, if they raise the aggregate amount of credits extended per quarter by more than 6% and the volume of allocated credits and guarantees is above 60% of the money they have attracted, the financial institutions will be required to deposit higher mandatory minimum reserves. This measure has been aimed to steeply reduce the growth in crediting. According to analysts of the Italian UniCredito - the owner of BULBANK - the expected shrinkage of bank loans will be compensated by an increase of external crediting for Bulgarian companies. The most difficult task is to forecast the effect of BNB's restrictions on the credit interest rate. The price rise of attracted money resource will restrict the reduction of interest on credits despite the severe competition on the Bulgarian bank market, UniCredito's experts predict. Banks are expected to react to the central bank's recent measures by orientating to the higher yielding and riskier consumer credits and crediting of small and medium-sized businesses. That will be a reflection of their aspirations to maintain the planned amount of their profits. The restrictions on bank loans will allow leasing companies, financial houses and credit cooperatives to stir up their activities and attract more clients. These financial institutions, however, are not regulated by a special legislation and their aggressive market behaviour exposes to the risk of frauds and abuse.

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