UniCredit Group: Bulgarian Households Remain Net Savers Despite Surge in Debt

UniCredit Group: Bulgarian Households Remain Net Savers Despite Surge in Debt

Despite a rapid surge in debt in the first half of 2007, Bulgarian households reconfirmed their position as a net saver, according to a UniCredit Group report made public here on Sunday. It is part of the Group's regular Central and East Europe Households' Wealth and Debt Monitor (2007-2009).

According to the report, household financial assets in Bulgaria increased by 27 per cent on an annual basis in June 2007, which, after adjusting for the consumer price inflation level of 5.6 per cent, results in a massive real increase of more than 20 per cent, BTA reports.

The report authors anticipate the growth of financial assets to continue at a relatively high pace, increasing by a yearly average of 23 per cent in the 2007-2009 period.

Household financial assets are expected to reach 60 per cent of GDP in 2009 from 51 per cent in 2007, posting yearly average increases of 21 per cent.

The authors of the report expect wealth accumulation in the household sector to maintain its solid growth momentum in the rest of 2007 which, if realized, would mark the fourth consecutive year of real growth above the 20 per cent benchmark.

On the macro side, the accumulation of financial wealth drew support from the convergence of incomes, an improving level of job creation, rising real estate prices and remittances by Bulgarians living abroad.

Adjustments to the composition of household investment portfolios continued in the first half. However, the authors expect deposits to keep their dominant position despite a moderate loss of significance in the long run. Pension and mutual funds are expected to be in the forefront of asset expansion, bringing a gradual convergence in the structure of household wealth towards Western European standards.

Household financial liabilities posted an even stronger increase of 39 per cent year-on-year in June 2007, as local banks continued to prefer expansion of the retail loan market and households grew more confident in their ability to serve higher debt levels due to improved labor market conditions, the report finds.

A large part of new retail loans in the first half of 2007 was channeled to the acquisition of new residential property and the renovation of existing housing, which, in combination with a massive rise in the real estate prices, further boosted the growth of real assets in the household sector.

According to the report, the introduction of a 10 per cent flat personal income tax from the beginning of 2008 and a cutback in the social insurance contribution rate will positively affect both households' disposable incomes and their propensity to save. The alleviation of the tax burden will be strongest for the highest earners, who also tend to save the most.

Mutual funds continued to break records, reporting the most rapid growth among all forms of household savings products (up by 147 per cent year-on-year in the first half of 2007). However, on the whole, the significance of mutual funds remains limited, accounting for less than 3 per cent of total financial wealth in the household sector in mid 2007. The recent turbulence in the international financial markets has proved to have only a marginal impact on the performance of local investment funds, with domestic factors being conducive to further development in that industry despite rising volatility.

Life insurance premiums demonstrated faster growth rates compared to those in the auto segment, which currently dominates the insurance industry. Health insurance remains rather underdeveloped.

The authors remain optimistic that Bulgaria will press ahead with the restructuring of its pension system and anticipate that the contribution of the private sector to pension insurance will increase, similarly to other CEE countries.

Risks for the individual savings holders are mostly related to the recent rapid increases in some companies' share prices on the local stock exchange, which may cause some downward correction in prices in the short to mid term.

The report predicts an acceleration of retail credit growth to 43 per cent in the end of the current year, as intensified competition has spurred banks to enter riskier customer segments and offer some one-off incentives.

The largest portion of household liabilities comes from mortgages and this trend should continue in the period of the forecast.

The preferred currency for retail loans remains the euro, resulting in a limited exposure to foreign exchange risk provided that the system of pegging the national currency remains unchanged until the adoption of the euro. Thus, the key source of vulnerability is associated with the quality of loans, particularly the relatively remote possibility of a sizable deceleration of real incomes in combination with an adverse shift in real estate prices. Some stabilization in the real estate market and the relatively high level of debt, when compared to local income limitations, will dampen the growth in retail loans to 26 per cent and 18 per cent in 2008 and 2009, respectively, according to the report.

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