Constantinos Kypreos, Vice President – Senior Credit Officer at Moody’s Investors Service, argued that the Bulgarian banking system is on a slow path to recovery after the crisis experienced with the collapse of Corporate Commercial Bank (KTB) in 2014.

Marco Zaninelli, a lead analyst for Bulgaria and other countries from Central and Eastern Europe (CEE) at Moody’s, added that the reforms initiated by the incumbent Bulgarian government are expected to balance out the negative developments of 2014.

Kypreos and Zaninelli were among the participants at the 6th Credit Risk Management Conference, organized by ICAP Bulgaria in Sofia on Tuesday.

ICAP is one of the most successful Business Services Groups in Southeastern Europe, operating in six countries from the region and is one of the few companies in Europe to have been recognized as a credit rating agency.

According to Kypreos, the operating conditions for banks in Bulgaria remain challenging, especially with the high corporate sector indebtedness reaching 110 % of the country’s GDP, which is more than double the level in other CEE countries.

However there are also positive developments, with the Bulgarian economy slowly recovering and improvements being made in the country’s banking regulation and supervision.

Kypreos said that the expected economic growth of 1.7 % in 2015 is below the potential of the country’s economy, with a slight improvement forecasted in 2016.

According to him, the unemployment rate of 10 % remains relatively high compared to other countries, but there are improvements in the labour market.

Another positive development is the stabilization of the real estate prices, which is providing additional support to the banking sector.

Kypreos noted that the Greek debt crisis and the potential of Greece leaving the eurozone posed a great threat as Greek banks account for nearly 20 % of the Bulgarian banking system.

However the agreement of a third bailout between Greece and its international creditors coupled with the decreasing risk of Grexit have both been beneficial for the Bulgarian banking sector.

Another positive development has been the acquisition of Alpha Bank, the only Greek bank out of the four operating in Bulgaria as a branch, by Postbank.

Kypreos highlighted that the collapse of KTB exposed major weaknesses in the banking supervision of Bulgaria.

He noted that it took a long time to deal with the crisis, with the bank run occurring in June 2014, but the repayment of deposits starting only six months later in December 2014.

According to him, the EU’s Bank Recovery and Resolution Directive, which entered into force on 1 January 2015, has been of significant importance as it provides for the relevant authorities to intervene earlier in bank crises before these get out of control.

He added that the Bulgarian National Bank (BNB) has also taken measures to ensure better supervision.

BNB appointed a wider group of executives responsible for banking supervision and its powers to intervene into troubled banks were enhanced.

In his words, the asset quality review and the stress tests, which are expected to take place next year, will restore the confidence of both the public and investors, including foreign ones, in the banking sector.

There have also been improvements in the funding conditions of banks, with deposits increasing as percentage of total funding.

His colleague, Zaninelli, who is also Assistant Vice President, Sovereign Ratings at Moody’s, pointed that 2014 has been marked by an increase in public debt, high unemployment rate, low levels of FDI and sluggish domestic demand.

These have been among the factors contributing to the slower pace of economic growth, which Bulgaria has experienced compared to other CEE countries.

According to him, the fiscal consolidation pursued by the government and the end of the 2007-2013 programme period of EU funds, has limited the potential for economic growth in the 2015-2016 period to 2 %.

However there have been some positive developments such as the increase in Bulgarian exports to the EU and the growth of exports to countries outside the EU.

In his words, these positive trends coupled with the implementation of the reforms foreseen by the government could result in Bulgaria experiencing levels of economic growth comparable to the ones demonstrated by other CEE countries.

Similarly to his colleague, Zaninelli also pointed out that inter-company lending continues to be a problem in Bulgaria.

The 2013-2014 period was marked by a deterioration in the level of confidence in both the consumer and banking sector.

The political crisis experienced during this period prevented Bulgaria from achieving the level of economic recovery experienced by other countries from Central and Eastern Europe.

Zaninelli identified two major shocks as having occurred in 2014.

First, the widening of the fiscal deficit as expenditures grew rapidly during the period of political instability, while revenues remained stable.

The other one was the failure of KTB, which accounted for the increase of public debt in 2014.

Until 2013, the level of public debt in Bulgaria had remained relatively low, but it increased by 9.2 percentage points in 2014 and is expected to reach 30 % of GDP in 2016.

However even such a level is still relatively low compared to the rest of the EU, which is one of the factors contributing for the credit worthiness of Bulgaria.

The collapse of KTB and the time it took to deal with the crisis, exposed problems in the governance of the banking sector and particularly shortcomings in the supervision exercised by BNB.

Zaninelli highlighted the need of fully implementing the reforms initiated by the incumbent government, above all those in the healthcare system, the energy sector and the pension reform.

The analyst identified three main pillars for reforming the banking sector and restoring confidence in it: aligning Bulgaria with the EU’s Bank Recovery and Resolution Directive; carrying out the asset quality review and stress tests; and improving the supervision performed by BNB.

In his words, the reform momentum is addressing the major vulnerabilities and shocks experienced in 2014, which makes plausible the forecasts for a mild economic growth and stable credit outlook in 2015-2016.