Is Bulgaria overheating?

SOFIA – Ani Damianova is doing what she never thought possible: living in debt like a real Westerner. She’s taken out a loan to buy a new flat and another to refurbish it, impossible for most Bulgarians a few years ago. «I’d also always dreamed about having a home theater, and now I’ve got one. It’s on lease, too,» said the 35-year-old publisher. While many of the Black Sea country’s 7.7 million people are enjoying their first real taste of consumerism, economists say a three-year-old lending boom could lead to economic overheating. Throughout Bulgaria, which will be the poorest member yet of the European Union if it joins next year as planned, people are taking out cheap loans to buy new flats, cars, plasma televisions and other goods. Attempts by the central bank to cap credit growth have done little to slow the surge, as banks shift from traditional lending to less regulated leasing operations. Cheap resources supplied by their foreign owners have let banks cut rates for euro-denominated loans to about 7.5 percent, from 10.5 percent in 2003. A typical 20-year, 80,000-lev (41,170-euro) mortgage costs a borrower about 750 levs a month. Although such payments would look cheap to a Londoner or Parisian, average wages here are 350 levs a month and market watchers say many poorer Bulgarians are overextended. A report published by the European Central Bank said the rapid borrowing in aspiring EU member countries, especially in foreign currencies, may make Bulgaria, Romania, Croatia and Turkey more vulnerable to financial crises. Torrent of imports The result is a torrent of imports and a wide current account gap which nearly doubled from January to April on an annual basis to 1.473 billion euros, or 6.1 percent of gross domestic product. Data from the central bank showed mortgages spiked 74 percent year-on-year in May. New car sales rose 35 percent. Economists note the trend is inevitable for any poor country that must boost productivity and catch up with the West. They say real economic growth of 5.6 percent in the first quarter, and foreign direct investment (FDI), expected to jump by a third to 2.4 billion euros this year, are positive signs. However, the structure of investment and runaway growth in imports, which outpaced exports 20 percent to 13 percent in the first quarter, gives them cause for concern. «If you look at the trend in the first few months of the year, it’s really not looking very pretty,» said Ivailo Vesselinov, an economist at Dresdner Kleinwort Wasserstein. Of last year’s foreign direct investment, more than a third was in retail banking activities. Four of the 10 largest deals were foreign-owned banks raising capital to boost lending. Another third of incoming funds went to the 6.1-billion-lev (3.08-billion-euro) construction and real estate sector. Many properties are bought by bargain-hunting foreigners, but Bulgarians are also getting into the home-buying craze, causing analysts to wonder whether the investment and lending booms are actually the two sides of the same coin. Other lending has gone to build hotels in Black Sea and mountain ski resorts, which are key to Bulgaria’s blossoming tourism sector, while hypermarkets and malls are mushrooming in cities, to the delight of consumers. Other investment, please Economists say that all investment is welcome, but its current focus may be to the detriment of exports and production, areas in which Bulgaria has lagged compared to neighbors such as Romania and the richer ex-communist states of Central Europe. Another worry is that, with the lev pegged to the euro since the 1996-1997 economic crisis, authorities have less room to adjust if the external shortfall, already large, spirals out of control. «FDI tends to be directed at the Bulgarian market – retail, banking, telecoms, real estate – and not at the export market,» said James Roaf, the IMF’s representative in Bulgaria. «That’s something the government needs to focus on.» Another problem is crumbling road and rail networks and Bulgaria needs to make sure that investment, both private and public, also flows into infrastructure projects. The inflow of billions of euros from Brussels if Bulgaria joins the EU on Jan. 1, 2007, as planned should help, but there are concerns Sofia may not be ready to tap the funds. For Olga Iankova, a 35-year-old leasing manager, the changes cannot come fast enough. «I want to trade in my old car – on leasing of course – but there’s one problem,» she said. «The huge holes in the streets. It just makes you wonder whether it’s worth it.»