site.btaAnalyst Warns of Lending Expansion Pitfalls

Against the backdrop of lasting political uncertainty, a stalled public investment programme and weak inflow of foreign private capital, the accelerating growth of bank lending to households in Bulgaria is clearly visible. Insistent assurances that it does not pose any risks, that Bulgarians are generally not deeply indebted, and that growing consumer incomes explain the rise in real estate prices, should not hide from view the macroeconomic dimensions of these developments. Loans are a fuel which plays an ever-growing role in propelling the national housing market and the construction sector, and indirectly driving more and more economic activities where consumer behaviour is determined by borrowing from banks, Institute for Market Economics (IME) chief economist Latchezar Bogdanov says in an analysis published on the IME website.

Bogdanov cites the following data:

• The monthly growth of home purchase loans accelerated further in June 2024, reaching 24.8% year on year. This is the highest year-on-year increase since April 2009. Household mortgage debts have risen by more than BGN 4.4 billion in net value in 12 months;
• New mortgage loans, excluding renegotiated refinancing arrangements, amounted to BGN 721 million in June 2024, according to Bulgarian National Bank figures, increasing by 28% compared with June 2023 and 57% compared with June 2022. In the first half of 2024, new mortgage loans exceeded BGN 3.6 billion, compared with under BGN 2.5 billion in the first six months of 2023, BGN 2.2 billion in the like period in 2022 and BGN 1.6 billion in the first half of 2021;
• At the same time, loan interest rates remain at historically low levels of around 2.5%. In effect, however, loan rates are often floating as they are tied to deposit rates. From a borrower's point of view, the expectation that loan service payments will remain unchanged in the next 25 or 30 years is ultimately based on the assumption that deposits will carry zero interest over that period;
• These resources go into the housing market, pushing real estate prices up while also boosting investment activity in construction. According to the National Statistical Institute, housing prices in Bulgaria went up by 16% on average in the first quarter of 2024 compared with the first quarter of 2023; in the capital Sofia, the increase was 18.2%. It is hard to confirm or deny that the decisive factor for this dynamism are buyers with considerable savings. At the same time, Registry Agency data show that mortgage agreements continue to increase substantially. In the second quarter of 2024, they grew by 19.5% compared with the second quarter of 2023; in Sofia, they went up by 24.1%. The figures for the first half of the year are, respectively, 21.8% and 27.4%;
• Consumer lending has increased as well, albeit at a slower pace of 14%. Net household debts have grown by more than BGN 2.2 billion in a year. Added to this is BGN 1 billion coming through non-banking institutions (quick loans).

All this helps to explain how the Bulgarian economy continues to grow despite more than a year of shrinking industrial production and exports, an unfulfilled public capital programme and a low level of private investment, the analyst says. We need to be aware of the effects which a possible cooling of lending activity (not necessarily a financial crisis) can have on the economic activities directly or indirectly affected by loans as well as on employment and incomes. While low unemployment and growing wages can objectively boost the capacity of households to assume and service more debt, the opposite dependence is often overlooked: lending increases demand and thus impacts investment decisions, prices, the structure of employment, profits and incomes. Economic history has taught us that the multiplier which works for expansion can also work the other way, towards contraction, the analyst says in conclusion.