The role of Banks in assisting the food processing sector on the way to EU accession Presenter: Athanassios Petropoulos Executive Director and Member of the MB of PostBank AD

The road towards EU Although Maastricht set very particular “technical” indicators for accession, more candidate countries come to realize that nominal compliance must be backed by real economic compliance through: Sustainable economic growth, backed by strong fundamentals; Building competitive advantages of local business, esp. companies working in the primary need food commodities; Setting business standards and practices that facilitate growth; Develop strong infrastructure, working legal system and liberalized capital and secondary markets to support the business.

Macroeconomic stability towards growth GDP growth has entered a sustained pattern of around 4% p.a.: Consumption has stabilized in a growth trend of around 7% p.a.:

Macroeconomic stability underlying fundamentals Inflation has been contained below 6%, resulting in below 5% CPI yoy: Unemployment has been decreasing, and will likely be contained below 13%:

Bulgaria’s sovereign ratings upgraded Recognition of these trends: Bulgaria’s sovereign ratings upgraded Supported by: Decreasing effective debt burden as measured by Foreign Debt to GDP ratio; Increased liquidity in the markets, easing inflationary pressure and increasing accessibility of funding for the local business; Political stability, with political consensus towards NATO and EU integration; Very stable financial system; Substantial FC reserves guarantee the stability of the Currency Board. But endangered by: Privatization progressing much slower than expected, with failure of big deals creating uncertainty among foreign investors; Inefficient legal system, with substantial problems and delays in courts; Corruption at different levels of administration and difficult to contain level of criminal activity; Lack of infrastructure development; Higher accounting transparency, better medium and long-term planning, export markets expansion is necessary for local companies (esp. SMEs) to achieve real “market maturity”.

The Role of Banks in creating investment and demand-driven economy prior to EU accession GDP growth: As major provider of funding for the business, the Banking System has the role of evaluating the business and moving funds towards more efficient ventures, and stimulating investments in quality and productivity, which create future competitive advantage. Consumption growth: As provider of financing for individuals, Banks enhance consumption (growing at 7% p.a. vs. 3-5% GDP growth), assisting especially in the development of investment goods demand through scheme loans for vehicles, furniture, household appliances, and mortgage loans for housing. Inflation contention: Through increasing efficiency, in the last 2 years, Banks have for lowered tangibly interest rates, decreasing inlfationary pressure, and helping BIR to move closer to Libor and thus enhancing the profitability of borrowers: Decreasing unemployment: With the development of new, more aggressive products targeting Small and Medium businesses, Banks have increased the accessibility to capital for start-up businesses, helping new business to expand faster.

The Role of Banks in creating sustainable business growth Funding Provider: Accounting for the undeveloped Capital Market, Banks bear the full burden of providing funding for all stages of development of the business, as well as developing the money and secondary markets. Accession / Foreign Aid Programs: On the majority of EU accession funds (like SAPARD) and foreign financial assistance programs (like USAID), the Banks serve not only as intermediaries in the funding process, but also as provider of additional funding, bridge financing and often direct know-how assistance in the business planning and investment process. Business Discipline and Transparency: Being among the most strictly regulated sectors in the economy, the Banking System is a major promoter of financial discipline and reporting transparency in the corporate clients, which is among the major requirements to be adopted during EU accession. Expertise / Advisory: Accounting for their ownership, the leading Banks in Bulgaria have extensive international contacts and expertise, which they are capable and have started sharing them with clients, facilitating the development not only of foreign trade, but also introduction of best business practices, which are key to survival of local businesses after accession.

The food processing sector in focus: Major role of Banks The Quality Problem: A major problem facing companies in this sector is lagging behind on EU quality compliance. Substantial funds are required for modernizing the production process, enhancing product control systems, new equipment and technology implementation. These investments are only partially covered and supported by EU aid programs. The key role of Banks is to assist the companies in their complete investment program, and with supportive working capital lending.. Market Diversification: Another problem is high dependence on the local market and a limited product range, often with seasonality in sales. To help companies enhance their product range and market access, Banks provide specialized Trade Finance and Factoring products. Attracting Foreign Investment: In seeking equity or joint-venture partners in order to strengthen their local and international market positions, companies in the sector increasingly seek the expertise of foreign-owned big banks in assisting them to establish the most efficient form of partnership and access a reliable foreign partner. Business Optimization: Companies using more actively banking service have introduced faster accounting transparency, helping them identify potential weaknesses, and using advisory services from their servicing Banks have built a comprehensive growth strategy that does not overburden them. Moreover, companies increasingly use Bank advisory for cash-flow optimization and funds management services, decreasing the seasonality impact.

The challenges of the future EU Integration: As intermediary and direct lender on pre- and post-accession programs, the Banking sector will continue to have a key role, especially accounting for its role in advising the entrepreneur on the projects. Business Expansion: The financing activity of Banks has been growing ten times faster than GDP, which has supported greatly the economy. A major challenge will be translating lending growth into sustainable business growth, supported fully by the legal framework, increased efficiency of the juridical system and infrastructure renovation, as well as entrepreneurial focus on business growth, especially in the key economic sectors – food processing, construction, energy and fuels, tourism. Investment Activity: Project finance for infrastructure has been practically non-existent and its appearance and development will depend on successful blending of public and bank financing. Postbank actively participates in EBRD, USAID and SAPARD financing programs. Support Small and Medium Businesses: SMEs, and especially those in the food processing sector, are key to low unemployment and sustained macroeconomic growth, and they depend very strongly on increasingly active Bank support for their future. Promote Bulgaria: Banks have to more actively participate in the marketing and promotion of Bulgaria among EU investors.