19
THE FINANCIAL MARKETS IN BULGARIA IN 2005
MONEY MARKET
With significantly large BGN resources (liquidity position) of the banking system throughout 2005, in the individual months excess resources fluctuated substantially and changed their size, the lowest level being in February and June (a daily average of BGN –5 617 thousand and BGN 5 300 thousand respectively). The traditionally highest BGN liquidity at the start of the year (a daily average of BGN 68 681 thousand of excess reserves) led to the lowest for the year level of interest rate (1.91% on average for the month for term operations) on the interbank market. In the following months it rose smoothly and steadily, and steadied slightly above 2%.
Liquidity in the banking system is regularly influenced every month by budgetary flows, and there was a decline in the commercial bank resources from issues of government securities – bills and bonds of the Ministry of Finance (by BGN 72.3 million for the year on a net basis), - and an increase from transfers for pensions and subsidies for municipalities.
As a consequence of the measures of the BNB for regulation of the commercial banks’ resources applied in June 2003 (a possibility for banks to credit their reserve accounts in euros with same-day value), in June 2004 (abolition of the buy-sell spread for cashless operations of purchase and sale of euros by the BNB), and in 2004-2005 (measures for restriction of credit expansion), the possibility for tension on the interbank money market was limited. The interrelationship between the injection and withdrawal of liquidity from the banking system and the redistribution of liquidity (through BGN and foreign currency money market transactions between commercial banks) improved.
Interbank money market
During the year commercial banks in the system intensified their money market participation and the total volume of deals reached BGN 54615.8 million, of which BGN deposit operations for BGN 52101.6 million (95.4%), repo-operations with government securities for BGN 924.7 million (1.7%), and outright deals in government securities (issued in the country, of any maturity and denomination) with movement on current accounts for BGN 1589.4 million (2.9%).
Compared to the previous year, the increase for all types of transactions is by BGN 22981.7 million, or 72.6%. The growth in market volume is due to a rise in term deals volume, namely only in deposit deals. The total increase in deposit deals is by 84.8% (BGN 23903.8 million), including a rise in unsecured deposit deals by 83.0% (BGN 23106.2 million) and a rise in secured deposit deals by 212.7% (BGN 797.6 million). In the part of repo operations there is a decrease by 35.2% (BGN 502.2 million). In the outright deals in government securities the size of the decrease is 20.9% (BGN 420.0 million), in the part of BGN-denominated securities trading there is a decrease by 22.1% (BGN 405.1 million), and in the part of foreign-currency-denominated government securities there is an 8.5% (BGN 14.9 million) decrease, basically due to the USD-denominated issues. The proportion for the year between the three types of transactions, deposit, repo, and outright: 95.4%, 1.7%, and 2.9%, does not differ substantially from that in the previous years (respectively 89.1%, 4.5%, and 5.9% in 2004, 88.3%, 6.1%, and 5.6% in 2003, 90.4%, 5.0%, and 4.6% in 2002, and 87.2%, 8.4%, and 4.4% in 2001).
In the group of deposit deals and repo operations, with the steadily formed proportions in the internal structure of the market by maturity of realisation, connected with the liquidity maintenance in the banking system, the most preferred were the one-day deals with a share of 94.6%, including 93.9% in deposit operations and 0.7% in repo operations.
In the structure of total deposit operations, unsecured deposit deals retained their prevalence, with a 97.7% (BGN 50929.0 million) share, over secured deposit seals, with a share of 2.3% (BGN 1172.6 million).
In ten consecutive months, from March to December 2005, there is a strong rise in activity on the interbank market on the last day of the month and the volume of deals reaches a record high of BGN 931.8 million on 30 December.
The substantial increase in market turnover in 2005 compared to 2004 is a result of the significant decline in the level of excess reserves (while total reserves were large) of banks in the separate months of the year, the average for the year of the monthly averages of the daily excess reserves (BGN 27720 thousand) comprising 88.7% of that for 2004 (BGN 31 268 thousand).
For 2005 the average interest rate in term operations of any maturity on the interbank market amounted to 2.04% for the totality, in deposit operations it was 2.04% (2.03% for unsecured deposit deals and 2.15% for secured deposit deals), and in repo deals 2.43%. A small excess of the interest rate in secured deposits over the rate in unsecured deposit transactions and in the repo operations rate over the rate in deposit operations is also observed in one-day deals. Given the prevailing weight of the overnight and the other short-term operations, the general average interest rate and the one for deposit deals for the year are close to the average for the year 2.04% value of the base interest rate, which in January was connected to the level of the annual yield of 3-month discount government securities on the primary market, and from February onwards – to the level of the interest rate in unsecured overnight deposit deals on the interbank market.
With an annual average 2.04% value of the interest rates, the monthly average size of the interest rates on the interbank market varied from 1.91% to 2.22%. In January increased liquidity pushed the monthly average interest rate down to 1.91%, and the decision of the European Central Bank on 1st December to raise its base rate (the minimum bid rate) to 2.25%, effective from 6th December was reflected in a substantial rise in interest rates on the Bulgarian interbank money market from 7th December that resulted in the highest monthly average level of 2.22%.
In money market operations in foreign currencies between resident commercial banks, 2005 confirmed the tendency to steady growth observed from 2003. Compared to 2004, the total volume of deals increased by 147.6% in terms of the BGN equivalent of the currencies, including a growth in foreign exchange deposit operations in all currencies (USD, EUR, GBP, etc,) by 137.6%, in repo operations with government securities 28.2 times, and in outright deals in government securities (issued in the country, of any maturity and denomination) 32.5 times. Also here one-day deals in foreign currency deposits were the most preferred, with an 82.8% share (79.0% in 2004).
With deposit deals still prevailing in the total volume of transactions in foreign currencies in 2005 година (95.6% vis-à-vis 99.6% in 2004) there is an increase in the share of repo deals to 3.2% and of outright deals in government securities to 1.2%, from respectively 0.3% и 0.1% in 2004.
Refocusing of the base interest rate
From 2005, the new index LEONIA (lev over-night index average, analogous in terms of formula and close in terms of value to the EONIA of the euro area), launched on 1st December 2004, provided a possibility for the BNB to shift its base interest rate (BIR) from the level of the yield on 3-month government securities on the primary market to the to the level of the overnight interest rate on the interbank market: the most important money market parameter. In order to preserve the neutrality of the central bank, the calculation of this level was based on the simple average of the values of the LEONIA for the business days in a concluded month, thus taking into account the monthly cycle of interest rate fluctuations. The calculated value becomes the BIR from the start of the following calendar month. The new methodology was adopted by the Governing Council of the BNB on 16 December 2004 with Resolution № 149 and came into effect from 1st February 2005.
Calculated under the new methodology, the base interest rate had its lowest value of 1.89% in February and its highest value of 2.06% in June, for most of the second half of the year it was a steady 2.04%.
FOREIGN EXCHANGE MARKET
In 2005 the total turnover of the foreign exchange market touched EUR 50 000 million. (The figure covers deals in foreign exchange against Bulgarian levs of commercial banks and the BNB with value date up to 2 business days and includes a double counting for trades between the BNB and commercial banks and for trades between the latter.) Compared to 2004, the total turnover grew by one third, and it doubled vis-à-vis 2003. Increase in foreign exchange trading took place in both segments of the market – trades with final clients and interbank trading.
The growth in client deals in 2005 was due entirely to commercial banks’ operations. As in the previous year, there is an excess in bank purchases of foreign exchange over bank sales of foreign exchange, and the excess of supply from final clients is almost evenly distributed in the two semesters without seasonal fluctuations. In this trading EUR-BGN deals prevail, with a share of some 80 per cent, both in purchases and in sales.
In 2005 total interbank trading marked a 32.3% growth compared to 2004. In the second half of 2004, after the removal of the buy-sell spread on the BGN/EUR exchange rate at which the BNB effects account transactions with its clients, and also in each of the two halves of 2005, transactions with foreign currencies for levs between commercial banks amounted to some half a billion euros. In inter-commercial-bank trading (excluding the BNB) deals in USD prevail over deals in EUR and other currencies.
The share of the central bank in the total turnover of the foreign exchange market in 2005 comprises 26.6%. On the interbank market, the BNB is a net buyer of foreign exchange, increasing its foreign assets from this factor with some EUR 1 500 billion. The prevalence of purchases of euros from commercial banks over sales slightly declines on the second half of 2005. In trading with final clients, the BNB is a net seller of foreign exchange for levs and the decrease in dealing with final clients in the second half of 2005 is due to a decrease in sales of foreign exchange for payments on the foreign debt.
CAPITAL MARKET
Government securities
The maturity structure of the BGN-denominated issues of the Ministry of Finance included 3M discount treasury bills and fixed-interest 3Y, 5Y, and 10Y treasury bonds. All fixed-interest issues were of the open type (auctioned in tranches during the year).
The issuance of 3M discount T-Bills became less frequent (6 issues for the year instead of monthly issuance), the size of the separate issues increased compared to 2004, but the total annual nominal value of placement (except the savings treasury bonds), BGN 95 million, was 34.0% smaller than that in the previous year. From February their yield at issuance ceased to be source for the base interest rate of the BNB.
Unlike 2004, no 12M and 7Y government securities were issued. Placement of 3Y government securities increased by 50.0% to BGN 150 million in par value, of 5Y securities remained at BGN 100 million in par value, and of 10Y bonds grew by 87.5% to BGN 150 million in par value.
The 14Y11M EUR-denominated issue launched in November 2003 had one new opening in early 2005, for EUR 15 million (less than a quarter of the amount issued in 2004).
As a result, the total size of placement of government securities decreased by 21.9%, including a 9.0% decrease in the total size of 2005-dated issues (BGN-denominated with 3M to 10Y maturity).
Average annual yield at issuance declined in all maturities.
Subscription for conversion of 25Y USD-denominated ZUNK (Law on Settlement of Non-performing Credits) bonds maturing 1st January 2019 into 20Y EUR-denominated government securities of the same status and maturity date was announced every quarter. Bids were received and approved only in the first subscription in March.
Apart from the abovementioned issuance, till June the Ministry of Finance continued the placement of treasury bonds earmarked for direct sale to individuals (the so- called targeted issues, or savings treasury bonds). 3Y BGN-denominated and 5Y EUR-denominated issues alternated, the size of placement and buyback being small (less than BGN 0.5 million per month). From July the sales of such bonds stopped and till the end of the year there was only buyback.
On the secondary market, the total sum of the outright deals between commercial banks (including those of the investment intermediaries that have been licensed for primary dealership) amounted to BGN 1589.4 million at market value, according to the statistics of operations with movement on current accounts with the BNB: 20.9% less than in 2004. Of this, the turnover of BGN-denominated bonds decreased by 22.1% to BGN 1429.5 million, the strongest drop being for short-term securities (now placed at greater intervals). In the case of EUR-denominated bonds there was a 0.4% increase in turnover to BGN 159.3 million, while trade in USD-denominated ZUNK bonds (one more part of which was converted into the EUR-denominated analogue in March) decreased multifold to BGN 0.6 million.
The decrease in the yield in the longer than 1 year part of the Bulgarian and of the euro area yield curve continued. Accordingly, there was further convergence of the two curves at a still lower level.