Markets Keeping Capital

Bulgarian central bank officials have moved quickly to quash suggestions, including those made in comments by the finance minister, Simeon Djankov, in early March, that the deepening Greek debt crisis could see a massive capital outflow from Bulgaria.

On March 1, Djankov said he was concerned over a potential flight of Greek capital from the local economy, adding he wanted reassurance from the Bulgarian National Bank (BNB) and the IMF that there was no risk to the development of the Bulgarian economy and business.

With Greek banks owning some 30% of Bulgaria's banking sector and accounting for around 20% of credits and 30% of deposits, any rapid exit could exert real pressure on the country's capital markets.

Speaking at a seminar focusing on Bulgaria's capital markets in Sofia on March 8, BNB's deputy governor, Dimitar Kostov, said that to date there had been no serious impact on the country's finance sector from Greece's difficulties.

To the contrary, there were indications that some companies were transferring capital in the other direction because foreign investors currently consider Bulgaria a low-risk destination, Kostov said.

"For now capital is being transferred from Greece to Bulgaria, because currently Bulgaria offers a good level of stability," he said.

Similarly, BNB's governor, Ivan Iskrov, said there was no cause for concern regarding a sudden capital outflow from Bulgarian subsidiaries of Greek banks towards their main branches.

"Every month the central bank carries out stress tests and monitors the banking system," Iskrov said on March 4. "There is nothing different for the Greek banks from a month ago. We are not doing checks on the Greek banks alone. We are monitoring all of the commercial banks. There are no reasons to worry."

Despite the reassurances from BNB officials, Djankov has not been alone in voicing concerns that the debt crisis in Greece could affect Bulgaria's capital markets and banking sector. In mid-February, Citigroup warned that Bulgaria was more susceptible to the risk of contagion from the Greek crisis than other neighboring countries such as Romania or Turkey. This was due to the high presence of Greek banks in the Bulgarian market, according to a Citibank report issued on February 11.

"This, in turn, leaves the country more vulnerable to adverse shocks associated with Greek banks' funding," the report stated.

However, while the risk was present, there had been no evidence that this sort of contagion was taking place, the report said. "We don't observe any signs of stress in the Bulgarian money markets so far," according to the Citigroup economists.

This lack of dislocation prompted the IMF to upgrade its growth forecast for Bulgaria at the beginning of March, predicting that GDP would expand by 0.2%, in contrast to the 2.5% contraction that the fund had projected earlier in the year and a marked turnaround from the 5.2% shrinkage experienced in 2009.

Combined with this modest growth, the IMF has predicted that inflation will remain low, running at around 2.2%, while the current account deficit will narrow from 8.5% in 2009 to 5.5% of GDP in 2010.

To help sustain this expected growth, the government has announced it will continue to make use of the capital markets to fund some of its activity, planning to issue bonds worth some €373m in 2010. Of this, the Finance Ministry has said €75.5m would represent net financing, while the remaining €297.5m would be the maturing of bonds.

According to the Finance Ministry, the intention was to issue two- and four-year bonds and avoid the sale of three- and five-year securities. This would harmonise the maturity of such bonds with the redemption periods in 2013 and 2015 of global bonds held by Bulgaria, the ministry said.

Early indications are that the government should have no troubles in meeting its refinancing targets. There were offerings in the first three months of the year, all denominated in Euros, with the February issue for €24.6m worth of bonds being oversubscribed some three times.

As long as external events to not conspire to drain funds out of the Bulgarian financial sector and the economy continues to move forward, there is a good chance that the country's capital markets should remain stable in the short to medium term.