Relatively high level of non-performing loans (NPL), overvalued real estate and high inflation – these are the risks for Bulgaria outlined by the European Commission (EC) in its annual Alert Mechanism Report, published in the first days of 2024.Overall, the challenges for the Bulgarian economy are few, but labor costs are rising quite fast, the authors of the report note.
The share of business loans to GDP in Bulgaria is relatively high compared to other countries in the region, although the recent trend is down. Estonia and Hungary are among the other countries that face a similar problem. The share of foreign currency corporate loans is also relatively high at 43%. At first glance, this poses a risk, which, however, is offset by Bulgaria’s participation in ERM II and the existence of a currency board, the report shows. Real interest rates in the country have been practically negative in the high inflation environment, the EC calculates.
For households, the loan-to-GDP ratio is much lower – only 23% in 2022, with a downward trend in a growing economy. NPLs in this segment are also declining, but remain at a relatively high level of 4% in mid-2023, above the EU average. Hungary, Poland, Croatia, Romania and Ireland also have a high share of NPLs. Along with loans overdue by more than 90 days, Bulgaria, Poland and Hungary also have a high share of Stage 2 loans – at risk of default. However, the EC reassures that banks in these countries are well capitalized and profitable, especially in Bulgaria where credit growth continues.
Unlike in other countries, the cost of servicing loans in Bulgaria is not increasing, which protects households from further indebtedness. The reasons are mainly the floating interest rates on mortgage loans, linked to those on deposits, combined with high liquidity in the banking system. However, the EC warns of a possible reversal in banks’ lending policies and risk in the household sector.
Property prices bring concerns – since 2013 they have risen more than incomes and according to the report they are currently overvalued by around 8% on average. In the banking sector balance sheets are strong – the core Tier 1 capital ratio and return on equity (ROE) are above the EU average, with profitability improving through 2022.
Bulgaria is not the only one facing these risks. For example high inflation could also be a problem for Croatia, the Czech Republic, Estonia, Lithuania, Latvia, Hungary, Poland, Romania and Slovakia. Overvalued real estate and a continued rise in property prices can also be observed in Spain, Portugal, Latvia and Slovenia. In Belgium and Hungary there is a slight decrease in overvalued housing prices.
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