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Statement by Mr. Svetoslav Gavriiski, Governor of the Bulgarian National Bank, at the 14th Banking Meeting, Sofia, 5 December 2001 LENDING SHOULD BE A SOURCE OF INCOME FOR BANKS Bulgaria will benefit from market stagnation, since as a result it will pay $ 400 million less on its external debt In the recent five years the banking system underwent a number of changes to reach to its quite good and stable condition. The ending year, however, was a relatively difficult one, as many things changed in the global financial world. Notwithstanding the abrupt change, particularly as the result of the different yield on investments globally, this year seems to be a good one for the Bulgarian financial system, and all banks will end it with positive results. The ratings it was given from abroad are also encouraging. The stress tests made have shown that the Bulgarian banking system is capable of withstanding various changes and significant pressures without being negatively affected. This is a proof that Bulgarian banks can face the challenges of the future. The globally existing uncertainty does not give clear signals as to what would happen next year, and how we can get the system prepared for it. The yield on all financial instruments has decreased and is expected to continue decreasing. This means banks' attitude to lending should change, because this is the only way to increase profitability and the opportunities of all credit institutions to cover their expenses. The argument on the lacking lending and the banking system's participation in the development of Bulgarian economy is periodically revived. Nevertheless, if we look at the real numbers, I believe more of the banks' positive results are accounted for by the reintegration of provisions, which indicates that in the coming year we should pay serious attention to this indicator. We should admit that next year the large amounts of deposits and investments abroad will feature a very low profitability, hence more attention should be paid to lending. In the next days Roumen Avramov and I will take part in an ECB seminar arranged for all candidate countries, specifically for assessing their financial systems. Bulgaria holds one of the leading positions in terms of bank asset privatization. The privatization of Biochim Bank is expected in the year to come, so the private holdings in the system will reach up to 90%. This is a level only one or two candidate countries have surpassed. Bulgaria, however, leads in terms of the interest margin between interest on deposits and loans. This is not good, and it indicates there is a need to reflect on improving lending conditions in this country and increasing the amount of lending. I fully agree with this position, and I am not taking sides in the argument between the two extremes - if there should be lending, and if there are proper conditions for lending. I believe that reasonable risk should be taken, but also that good conditions should be more generally provided for lending to our economy. By no means, however (and this should find its place in the possible future arrangement with the IMF), would the government press commercial banks to lend at non-market terms and conditions. Low-interest loans that will start being extended will be from the government budget. The good operation of the Currency Board Arrangement continues, and Bulgaria will be able next year to service its debt without a drop in its foreign exchange reserves. Now we have the highest level of forex reserves in the recent 5 years. In the past year it was DEM 7.2 billion, for this year we are expecting a level over DEM 7.5 billion. This is more than USD 3.5 billion, which has never been achieved so far. A significant role for this level of reserves was played by the Eurobond issue made by the government, which had a stabilizing effect on both the forex reserves and the fiscal reserves of the government. The latter has also reached one of its highest levels ever, which justifies the expectations the government will be in position to service all its liabilities both domestic and foreign. As a consequence of all adverse concurrences in the previous year, Bulgaria gained certain advantages both as an indebted country and as a fuel importer. Due to the reduced interest on foreign currencies and securities, our liabilities decreased considerably, and in the next year our debt will amount to a little over $ 800 million, while previously it was evaluated at $ 1,200 million. This improves considerably our position and the balance of payments. The expectations for oil price stabilization also provides some advantages for us as a substantial importer of energy resources, and this, combined with the two indicators, allows us to look with confidence at the level of the trade balance, the current account, and the balance of payments in general. I think that irrespective of the expectations for the next year we can state from now that we have no reason to expect any problems in the financial area. The next IMF mission is coming, and I believe we will be able to come to an agreement. This will add up to the financial stability of the country. I believe that there is room for improvement of banks’ activities. Typical of any economy in transition is the weak participation of the banking system as a mediator between financial resources and companies. A big problem witnessed in the economies in transition, and to a smaller extent in Bulgaria, is the participation of large foreign banks in the domestic market. I observe the trend of big foreign banks taking their main banking business out of the country and rechanelling it to the respective head office. I hope that this will not happen to the maximum extent in Bulgaria, and I think that the foreign banks, operating here, will pay serious attention to the Bulgarian economy and invest more funds in it. This is a real problem, because in a great number of countries foreign banks do have a considerable share. In Bulgaria this share may soon reach up to 80%, which implies that the whole financial system is dependent on the decisions of the head offices outside Bulgaria. I think that this is a serious problem and I hope it will not be faced by our country. We can not disregard the good experience and the new services offered by them. However, I think that so far the foreign banks have to a large degree fallen in line or operated in tune with the behaviour of Bulgarian banks. Similarly, they are cautious in lending, as they are unwilling to take a high risk, and I would like to see this behaviour changed. We are looking forward to a great event in the beginning of next year. To my mind, this is an event, which will bring about a world-wide change – and this is the introduction of the Euro. I think we are ready to face this great challenge and that it will not cause any disturbances among the public, and of course, within the banking system. In any case, for the time being I have no information whatsoever about any existing problems with regard to the provision of banknotes or information on these banknotes. Anyway, some tension during the first months of introducing the Euro would seem quite normal to expect in Europe and world-wide, but let’s hope it does not last too long. The level of deposit guarantee was increased, which to a large extent backs up the mass of deposits within the banking system. I believe that this will strengthen the public confidence and will boost up deposit growth. This, on the one hand, will have a positive effect, and on the other – will create a problem: you will be at a loss as to how to handle the funds thus collected, given the sufficient resources that you already have. This has its good and its bad side. Nevertheless, I believe that the economy has taken a good direction and there are already large companies, both local and foreign, which can use funding from the banking system. I do not know why we still rely on the stability pact, which, to my mind, is just an idea – we have only been listening about projects for over two years now. I, personally, have not seen any such project implemented. We discussed the reduction in the minimum reserve requirement. The development of the banking system does not need any abrupt changes as this would only bring about, time and again, pressure on the foreign exchange market in a direction of foreign currency demand. However, we have not given up completely the idea, or the discussions of any such ideas. I think it would be good to discuss the possibility of differentiation, reduction of the minimum required reserve against the long-term deposits, held by banks. I will reiterate that in the next year I hope there will be no disruptions. I think that we have sufficient reserves to meet both economy development and the enhancement of its efficiency, so there is no need to revise any exchange rates or abandon the Currency Board Arrangement. Our way of walking out of the currency board will be the accession to the Euro. When I say the Euro, I certainly do not mean 2 euroisation. With our accession to the EU, and our participation in the European System of Central Banks we will in effect walk out of the currency board. That is the most favourable exit for Bulgaria. I would like to wish you much health and success. 3