bulgaria economic overview

Macroeconomic performance

After several years of strong economic growth, Bulgaria has experienced a sharp slow-down that began in the fourth quarter of 2008 and has continued throughout the first half of 2009. The weakness in economic activity has come through two channels. First, a reduction in external demand, with exports down as much as 30 per cent over the first six months of 2009 year on year. Second, domestic demand has contracted as private capital inflows have dried up significantly and consumer and investor sentiment have worsened. Industrial output, construction, tourism and other services are all down sharply.

The internal and external imbalances associated with the years of strong growth have mostly been reduced. The rate of inflation fell to below 1.5 per cent in August 2009 (from 12 per cent in 2008) because of the reduced domestic demand, as well as lower world prices for some food and commodity imports. The declines in consumer and investment spending have also led to a further slow-down in imports during the first half of 2009. Thus, despite the fall in exports, the trade deficit has dropped and the current account deficit narrowed to 18.1 per cent of GDP in annualised terms at the end of the first half of 2009, down from 24.6 per cent of GDP at the end of 2008. Fiscal policy has remained prudent (with the exception of pre-election months in the second quarter of 2009). In 2008 the general government surplus was 3 per cent of GDP and the new government is planning for a balanced budget for 2009 and 2010 mainly by improving tax compliance and cutting expenditures sharply.

Outlook and risks

As an open economy increasingly integrated into the European Union’s internal market, with a banking sector primarily owned by international banking groups with head offices in other EU countries, Bulgaria’s economic recovery is very much dependent on developments in the European Union as well as other neighbouring countries. The Bulgarian economy is forecasted to shrink by 6 per cent in 2009, with only a modest recovery starting in 2010.

There is a risk that the asset quality of banks could deteriorate significantly if the economic slow-down is deeper or longer than expected. There are also some vulnerabilities linked to Bulgaria’s large external financing needs arising from current account deficits and the fact that one-third of the external debt is short term. At the same time, medium-term prospects for growth remain favourable and Bulgaria has a well capitalised and well regulated banking sector while the central bank holds a large amount of foreign reserves. The overall fiscal position is also sound with fiscal reserves in excess of the low level of gross public debt, and Bulgaria’s history of fiscal surpluses reflects an understanding across the political spectrum of the importance of fiscal prudence in the context of the currency board arrangement.