The faster than expected recovery of export early in the year will probably make UniCredit economists adjust positively their March forecast of 1.9% GDP growth for 2015

The recovery of the Bulgarian economy will be more and more manifest this and next year. The banking sector is going to carry out an asset quality review and for this reason some of the credit institutions will take actions to reinforce their capital positions. Others which don’t need to do so will seek opportunities to increase their portfolios of new loans.

In this context, the spread between interests on deposits and loans will remain at its current level at least until the end of this year. This will be accompanied by a certain lowering of interest rates on both deposits and loans. The pace of this process will be no more than a half percentage point a year. Loan interest rates will start to decrease at a faster pace after the middle of next year, and in the long run there seems to be a significant potential for a further decrease and for tightening of the spread between deposit and loan interest rates.

How big this potential is will depend, along with other factors, on how far the forthcoming sector reorganization processes will go. If the regulator finds a way to drive the sector towards a faster absorption of the remaining losses in their portfolios and is more insistent regarding the eradication of the still remaining bad practices of lending and the violations of the reporting and disclosure requirements, if and where such exist, there can be expected acceleration of the processes of consolidation, leaving inefficient players out and after all improved efficiency and profitability of the system. This finally should allow a further decrease in the price of loans to households and companies from the real economy.

Any forecasting is quite difficult, but yet with a scenario like this it is possible that the average interest rates on corporate loans may decrease to nearly 4.50% at the end of 2017 for the entire system, compared to the 5.87% reported in March this year. The potential for lowering of loan interest rates for households might be even bigger – the average price of the entire loan portfolio of the sector may reach around 7.75% at the end of 2017, compared to the 9.30% rate reported in March 2015.

The faster than expected recovery of export which we have been witnessing since the beginning of this year will probably give further grounds for the economists of UniCredit Bulbank to make a further upward revision of their March forecast of 1.9% 2015 GDP growth with the publishing of the next CEE macroeconomic update envisaged for the middle of June.

The analysis is prepared by Kristofor Pavlov, chief economist of UniCredit Bulbank.

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