Bulgaria's Developing Treasury Environment

Booming domestic demand and stronger than expected consumption growth is being accompanied by under-performing exports putting downward pressure on GDP growth (6.1% expected for 2007). Cooling of domestic demand to curb imports and stimulate exports is needed but not happening so far. The composition of imports is vaguely positive with investment goods and raw materials growing the fastest. The current account deficit is expected to increase to just above 20% of GDP by the end of 2007.

The external indebtedness of the country continued to increase in July, reaching €22bn (76.4% of the projected GDP for 2007). One of the hot issues in Bulgaria is the domestic credit expansion since the beginning of the year. After the central bank lifted the administrative restrictions on credit growth, effective from 1 January 2007, claims on the private sector accelerated sharply. Although the banking supervision standards in Bulgaria are generally stricter than in most EU countries and banks are very well capitalised, the central bank also seemed to be concerned about recent credit developments. Effective from 1 September, BNB raised the minimum reserve requirement rate from 8% to 12%, which could have some cooling effect on the demand for credit, depending on the reaction of the banking system.

Since July 1997, Bulgaria has been operating a currency board arrangement. In short, this means that the central bank is obliged to cover 100% of the monetary base (currency plus commercial bank deposits at the central bank) with international reserves and to buy and sell leva against euros at a fixed exchange rate. The fixing rate is set at BGN 1,95 for €1.

Bad weather conditions and poor harvest increased inflation to 12% YoY in August from 4.1% in March 2007. The government has also decided to move the tobacco excise tax hike planned for 2010 forward to 2008 and 2009. The increase in 2008 of around 33.8% would lift average 2008 inflation by some 1.4pps. We estimate average 2007 inflation at 8% YoY and 8.5% in 2008.

Although the unemployment rate dropped to 7% in August, the lowest level in the last 17 months, the economic performance in the first year of EU membership is disappointing. The probability of a hard landing is increasing since the authorities seem to ignore the risks. The medium term growth outlook is therefore a little less positive, although we expect GDP growth to stay above 5% till 2009.

Banking Sector

The banking business in Bulgaria is well developed and highly competitive, comprising both local and well-known international players. There is strong pressure on fees and interest margins while the quality of the services is rapidly increasing. The fact that the largest commercial banks operating in the local market are subsidiaries of foreign banks (mostly EU-based) makes it easy for them to mobilise money at a relatively low cost internationally.

The next hot issue is the single euro payments area (SEPA) and its implications in Bulgaria. Led by the BNB and Bank Association, there are intensive discussions on how and when the SEPA payments and direct debits will be introduced, what will happen with the local clearing system and domestic payments. There are suggestions that local payments can be routed through the same infrastructure required by SEPA or wait for the euro adoption accession. The government is proposing 2010-2012, which is most probably too optimistic. Taking into account that most of the banks in Bulgaria are large commercial banks, operating in the EU, it is expected that all key players in the local market will be SEPA reachable, and execute SEPA products in the course of 2008. One of the aims of SEPA is to achieve no distinction between local and cross border payments in euros, since the cross border flows out of Bulgaria are still under restrictions and require justification for every payment above a certain amount. In most cases, the restrictions create obstacles to a free flow of cross-border payments and to the introduction and implementation of sophisticated cross-border cash pooling schemes.

Electronic banking is also an area of severe competition among the banks, as most offer online applications accessible worldwide and accommodate the needs and requirements of their clients in conjunction with various formats and specifications required by client interfaces and internal systems, such as SAP, for example.

Cash Management

Domestic and foreign currency account restrictions

Residents can hold foreign currency accounts both within and outside Bulgaria. Residents holding a foreign currency account abroad must inform the Bulgarian National Bank within 15 days of the account being opened. If a transfer is made abroad in excess of BGN5,000 from a resident foreign currency account, the commercial bank must declare the purpose of the transfer. Transfers abroad in excess of BGN25,000 from a resident foreign currency account require supporting documentation.

Residents may also hold domestic currency (BGN) accounts abroad. These accounts are freely convertible into a foreign currency. Residents holding a domestic currency (BGN) account abroad must submit a statistical declaration to the Bulgarian National Bank within 15 days of any payment on that account.

Non-resident accounts are also permitted. These can be denominated in the domestic currency (BGN) and some foreign currencies. Non-resident accounts denominated in BGN are freely convertible. If a transfer is made abroad in excess of BGN5,000 from a non-resident foreign currency account, the commercial bank must declare the purpose of the transfer. All accounts are fully convertible.

Exchange controls

Bulgaria applies some exchange controls:

• The import and export of cash in excess of BGN8,000 by individuals must be reported to customs. Additional requirements apply if the amount exceeds BGN25,000.
• Proceeds from invisible transactions and current transfers must be repatriated.
• Transfers on bank accounts held abroad in excess of BGN25,000 must have supporting documentation.
• Inward investment in excess of BGN25,000 must be registered with the Bulgarian National Bank.
• Residents holding bank accounts abroad must report transactions on these accounts to the Bulgarian National Bank within 15 days.
• Any single investment abroad up to BGN25,000 in value is required to be declared to the BNB within 15 days. Supporting documents meanwhile are required to be submitted to a domestic bank for investments exceeding BGN25,000.

Which transactions must be reported?

All transactions between resident and non-resident bank accounts and all cross-border transactions must be reported monthly on an aggregated basis to the Bulgarian National Bank, if they are BGN5,000 or more. Underlying documentation must also be provided if a cross-border transaction exceeds €25,000 or if requested by the Bulgarian National Bank. Cross-border transactions are required to be reported within three days of the end of the month.

Resident legal entities must also report direct investments held abroad, transactions on bank accounts held abroad and receivables and liabilities from non-residents on a quarterly basis. These must all be reported within 15 days of the end of the quarter.

Bulgarian citizens must also report direct investments held abroad, transactions on bank accounts held abroad and receivables and liabilities from non-residents if they are equal to or exceed BGN50,000. These must all be reported on an annual basis and within three months after the end of the reporting year.

Payments/clearing systems/instruments

There are two main clearing systems in Bulgaria called RINGS and BISERA. RINGS is Bulgaria’s RTGS system, processing high value and urgent domestic payments. It is operated by the Bulgarian National Bank. BISERA is Bulgaria’s retail payment system, processing the majority of domestic payments. It is operated by Bankservice, a company owned jointly by the Bulgarian National Bank and a number of local commercial banks. Cash remains the dominant payment method in Bulgaria. Electronic credit transfers are the most popular cashless method of making payments, in terms of volume and value. The use of payment cards has increased over recent years. Overdrafts are permitted.

No distinction is made between high- or low-value cross-border payments. There is currently no dedicated mechanism (such as Target) for effecting urgent cross-border payments. In terms of non-urgent EU payments and other cross-border payments, all banks will have their own means of making cross-border payments. There are three different structures, which often work in concert, depending on each bank’s own international coverage.

Cash concentration/zero balancing/target balancing

Some domestic cash concentration techniques are available, although they are not in common use. The participation of accounts held by different legal entities in the same cash concentration structure is subject to restrictions. Specialist legal advice should be sought before a cash concentration structure is implemented. Foreign exchange controls mean that few Bulgarian companies participate in cross-border cash concentration schemes.

Notional pooling

Notional cash pooling is available, although legal advice should be sought before a cash pool is implemented. Cross-border notional cash pooling is not commonly available in Bulgaria.