Ivan Iskrov: Global and regional challenges to the economy and the
financial system. Do we have working solutions?
Opening address by Mr Ivan Iskrov, Governor of the Bulgarian National Bank, before the
International Scientific Forum "Global and Regional Challenges to the Economy and the
Financial System: Do We Have Working Solutions?" organised by the VUZF University,
Sofia, 10 May 2012.
* * *
Dear Mr. Rector,
Dear Participants and guests of the conference,
Ladies and gentlemen,
It is an honour and a pleasure for me to take part in the opening of this International Scientific
Forum organized by the VUZF University. I would like to thank its Rector, Prof. Vazov for
inviting me, and through him to congratulate the University on the occasion of its remarkable
10th Anniversary.
The academia are famous for their conservatism but here, only a decade after its foundation,
your University established itself as one of the leading universities in Bulgaria in the area of
finance and insurance. An example of the high European standards to which the
VUZF University aspires, are the joint bachelor's and master's degree programmes with the
University of Sheffield. In addition, the Extended "Erasmus" University Charter awarded by
the European Commission provides opportunities to VUZF University students to train and
have internships at EU universities and companies.
It was announced lately that in the recent five years 55 thousand people have graduated
economy in Bulgaria. Against the background of this interest to higher education in
economics, the VUZF University gained a reputation as one of the most attractive higher
education establishments for young people seeking the optimum combination between
theoretical knowledge and practical training. One of the reasons is that VUZF University is
known for its policy of attracting as priority professors of great experience, acclaimed as
practiced professionals in their area of expertise.
This is very gratifying for me, because as an employer in large financial institutions since
1997 I have been aware that the discrepancy between theoretical knowledge and practice is
a serious issue facing newly-minted economists upon their graduation. And practical
experience gives a great momentum at the beginning of any young person's career
- because it not only teaches them specific professional skills, but also develops their
comprehensive qualities, such as team work skills, efficient time management, motivation to
seek alternative solutions in a competitive environment, etc.
VUZF University however is not just a place of education, it is a centre of research,
discussions and generation of ideas. Today's forum is another proof of this.
A year ago, again before the audience of a scientific conference organized by
VUZF University, I expressed my purely professional dissatisfaction with the fact that we
rarely hear the prudent voice of the Bulgarian academia. While the world has been analyzing
and discoursing for years on the causes, manifestations, and lessons learned from the global
crisis, our academic community rarely expresses any views on these issues and seems to be
still encapsulated in its own circle, engaged in its internal management or even day-to-day
problems.
Therefore I am glad now to admit that in this also VUZF University is an exception. I have
been following with interest the public appearances of your rector, vice rector, and other
professors and academics of your university. VUZF University representatives have often
come up with authoritative public comments on topical economic subjects of great public
significance.
Today I congratulate VUZF University for outpacing "the older" universities of economics by
organizing this timely discussion. The announced topic - "Global and Regional Challenges to
the Economy and the Financial System: Do We Have Working Solutions?" - speaks for itself
and is an eloquent testimony to the importance of today's forum.
Because external environment is of special significance for the dynamics of such an open
economy as that of Bulgaria. It is a known fact that the original causes of the global financial
and subsequently economic crisis did not stem from our region or from Europe's emerging
markets. Still, we should in no way take comfort in the external origin of the crisis because no
matter what the origins of the crisis might be, we, here in Bulgaria, must deal with its
consequences.
This is the right place to stress that the BNB is aware of its huge responsibility for the
financial stability of this country and consistently works in fulfilment of the functions and tasks
assigned to it by law.
In its work, the Central Bank collaborates with many other international and national
institutions, and whenever a need arises, it steps into the role of a constructive opponent.
Because, as I have stressed on various occasions, it should not surprise us, nor should we
show intolerance to the fact that the political institutions in the democratic countries are very
sensitive especially with regard to quick achievements within the context of the electoral
cycle. Whereas the tasks of central banks go beyond the horizon of the next parliamentary or
presidential elections. We are guided by the understanding that we have to keep our
reputation as institutions with national responsibility, holding as our priority the long-term
economic interests of the people and of the state. Hence, the fundamental logic of the so
very important (and very strictly adhered to throughout the EU) principle of national central
bank independence and the need to provide independent analyses and information to the
general public.
In this sense, we, at the BNB, just as we have done so far, will always support an economic
policy in Bulgaria that does not threaten long-term economic interests at the cost of achieving
quick economic effects - such as the policy of continuing structural reforms, enhancing the
efficiency of institutions and improving the general environment for doing business in this
country. The BNB traditionally supports conservative fiscal policy owing to which Bulgaria
today demonstrates excellent fiscal indicators and given the stable banking system we have
reasons to expect that our new issue of euro-denominated Bulgarian global bonds will be
well received. We would also welcome efforts at speeding up privatization and active
concessioning - inasmuch as they would not only strengthen our country's fiscal position, but
would also improve the long-term competitiveness of the Bulgarian economy. We, however,
cannot be indifferent to any ungrounded economic experiments whatsoever.
At the same time, the range of working solutions for Bulgaria's economic prosperity must
also take into account the analysis of the comparative advantages of the Bulgarian economy
in a global context.
In fact, it is exactly the current crisis that has highlighted and provided empirical evidence of
the resilience of Bulgaria's economy. Allow me to recall that before the crisis many argued
that the currency board in Bulgaria was restraining the economy's flexibility and that the high
current account deficit (above 1/4 of GDP in 2007) was a dreadful "imbalance" that could in
no way be funded in the event of capital flight from the country. To the surprise of many
institutions and experts, a great part of them of proven experience and repute, BNB's gross
international foreign exchange reserves increased from BGN 24.9 billion as at the end of
2008 to BGN 26.1 billion at the end of 2011. Presently the lev is more than 150% covered
with BNB's international foreign exchange reserves of the highest quality (not even taking
into account the government's deposit). In short, for fifteen years now businesses and
citizens have benefited from the predictability and stability resulting from the fixed exchange
rate and the stable Bulgarian banking system. Not lastly, in the past year the current account
turned positive after an impressive growth of Bulgaria's exports for two years in a row (by
over 30% annually in each year), and at a growing share in total EU imports. All this offers
interesting matter for discussion at a forum like this one. How do adjustments and
counteracting "imbalances" in a small and open economy with a currency board fit into
orthodox economic theories and explanations from popular textbooks, which are as a rule
written about economies quite different from that of Bulgaria, and by authors of a radically
different economic background? I am curious as to what conclusion today's scientific forum
will reach.
Another big myth about Bulgaria was the imminent "collapse" of our banking system
(because of the "avalanche" of bad loans and the "dependence" on foreign banks which
would have run away in panic and withdrawn their capital from Bulgaria). None of all these
apocalyptic prophecies has happened. Our banking system kept sizable buffers and
demonstrated impressive for the whole EU ratios of capital adequacy and liquidity. Given the
high level of domestic depositors' trust (only in one year, until March, total deposits increased
by over BGN 5 billion), the dependence on foreign sources of funding diminished
considerably - at end-March less than 13% of total attracted resources comes from parent
banks abroad, as opposed to nearly 1/4 at end-2008. Ultimately, unlike some of the more
advanced economies, no bank in Bulgaria needed to be rescued.
And the very frequent headlines about "bad" loans do not reveal the true picture in Bulgaria
as compared with the other economies in the EU. The reason is that the legal framework,
financial reporting standards and regulatory practices in the various countries are rarely the
same, and this seriously hampers any comparisons across countries (as an example, some
countries directly write off and keep off-balance sheet a large part of their non-performing
loans). For instance, focusing solely on 'bad' loans may be misleading if it is not
accompanied by the clarification that the assets in the banking system balance sheet are
very little exposed to the risk of mark-to-market revaluations (and exactly the manifestation of
that risk became the biggest problem in many of the "advanced" banking systems).
Furthermore, it is very common in Bulgaria to comment on the gross non-performing (over
90 days past-due) loans ratio, whereas the economically more significant ratio is the "net
non-performing (over 90 days past-due) loans/net loans" ratio - it correctly reflects the fact
that the risk has already been taken into consideration in the income statement through the
impairment costs that banks have actually made. Also, as a rule, net non-performing loans
represent the part of the loan portfolio covered by highly liquid (and acceptable under the
BNB's high standards) collateral. Net non-performing loans in Bulgaria hold a share of
10.71% at end-March 2012. What I mean to say is that the analyses and conclusions about
non-performing loans across countries are useful only when they are based on comparable
values.
Despite the objective indicators, all the resilience and adaptability of the economy and
banking system in Bulgaria remain unnoticed by many international observers and the
leading world media. Even the analyses made by European and international organisations,
known for their high expertise, still lack understanding of the economic specifics in the
different countries. Instead, they often use the easier approach (which has proved wrong) to
group countries and entire regions by meaningless geographical characteristics, and these
are simply "labelled" along with superficial and clichéd conclusions. Such geographical
approach that fails to take into account the very diverse economic structures, institutional
environment, or even political and historical traditions, may well be appropriate in
meteorology, but definitely not in economic analyses! I believe that today's conference will
touch on this range of issues too.
That is why I expect to have some of the above-mentioned issues analysed today at your
forum. Seeking useful ideas and working solutions for exiting the crisis would continue, as
the crisis itself is not over yet. We are far from having ensured that lasting recovery of the
economy back to the rates of growth that correspond to its potential. In Bulgaria and in
Europe as a whole the risks to economic development remain, as can be seen from the
continuing flows of negative data - limited consumption, weak investment interest, subdued
labour market, volatile financial markets.
I wish you fruitful discussions and success to your forum!