BNB: Rise of the credit market will slow down, active demand for mortgage and corporate loans will continue

Growth in the private sector lending will slow down this year, mainly due to the lower demand for loans by the households. This is expected from Bulgarian National Bank (BNB) in its latest “Macroeconomic forecast”. According to the document the growth of lending will reach 6.8% this year, compared to 8.8% by December 2021. The slower pace will come due to the households that will not take out so many loans in conditions of increased uncertainty in the economy and slow growth of private consumption. 

However, the demand for housing loans is likely to continue. According to the experts of the Central Bank, high inflation rate this year and still low interest rates will stimulate mortgage loans. 

About the real economy – non-financial corporations, the annual growth of lending in 2022 is expected to remain close to the last year’s levels. 

“Significant rise in energy prices and various raw materials probably is likely to continue to support the demand  for bank resources for working capital and stock during the year, while the demand for investment loans will be strongly suppressed”, said BNB. Probably, we will see restrictions on lending due to the increased countercyclical capital buffer – BNB forced commercial banks to increase it from 0.5% to 1% from October 2022, and to 1.5% from the beginning of 2023. This means that banks will set aside more reserves and provisions for loans they have granted. The expectations are that this measure will have a restrictive effect, due to increased requirements for bank equity and liabilities. 

 

 

Subsequently, in 2023-2024, the forecast is for increased lending activity, thanks to rising investments in the private sector of the economy and higher consumption, led by the households. The forecasts were made with expectations for an increase in interest rates in the euro area, which will be reflected in Bulgaria.

Overall, the forecasts for 2023-2024 are more optimistic – more household consumption, growth of wages and reduced uncertainty,  compared to 2022. Employment will increase by 0.5% this year, and for the next year forecast is for a 0.9% rise. However, worse demographic trends in Bulgaria will have a negative impact on employment. According to the report, there will be an increase in salaries this year. The main reasons are two – labor shortages and inflation.

Interesting fact – in the Medium-term budget Forecast 2023-2025, published a few days ago from the Ministry of finance, minimum wage is set to remain at the current level of 710 Bulgarian leva. 

Many Bulgarians officially work at this level and high inflation rate will significantly reduce their disposable income, which often leads to difficulties in repaying loans.

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