Population 7.285 million
GDP 50.806 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
0.5 |
1.8 |
0.5 |
1.2 |
|
Inflation (yearly average) (%)
|
2.4 |
4.2 |
2.5 |
2.8 |
|
Budget balance (% GDP)
|
-3.9 |
-2 |
-1.3 |
-1.2 |
|
Current account balance (% GDP)
|
-1.6 |
0.7 |
-0.5 |
-2.1 |
|
Public debt (% GDP)
|
14.9 |
15.5 |
17.9 |
16.4 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Low public debt
- Prudent macroeconomic policies
- A consolidated banking sector
- Stable exchange rate due to currency board
- Cheap labour force
WEAKNESSES
- Weak export industry
- Very vulnerable to external shocks
- Still high external debt
- Companies highly exposed to exchange rate risk
- Insufficient progress regarding governance
Risk assessment
Growth engine change
Despite the recession across the euro zone in 2012, growth remained positive, especially due to resilient domestic demand. Growth slowed in Bulgaria’s main trading partners (Germany, Romania, and Turkey) in conjunction with the euro zone recession. Consequently, the demand for Bulgarian products was weaker. Economic recovery in the euro zone is not expected before the fourth quarter of 2013, so the trade balance will continue to put pressure on growth. Private consumption will remain the driver of growth in 2013. In fact, higher disposable income comes together with lower interest rates on bank loans which will facilitate borrowing. However, the banks are excessively prudent and tend to prefer to remain “over-liquid”. Tensions in terms of bank liquidity in Western Europe can only strengthen this attitude. The conditions for granting credit could, therefore, tighten rapidly. Meanwhile, investment will increase in 2013. In particular Bulgaria has signed an agreement with Russia to allow the South Stream gas pipeline to transit the country. This project will have numerous positive effects on the local economy especially regarding jobs. Moreover, several public investment projects, co-financed by the European Union, are planned. Unemployment, which dropped in late 2012 (unemployment at 12%), will continue to fall in 2013. Inflation will increase slightly in 2013 in a context of dynamic domestic demand. Nevertheless, with oil and food prices stabilising, there is less risk of sudden inflationary pressure.
The current account deficit will widen slightly in 2013
Weak exports, together with higher imports, will affect the current account balance, which will post a deficit in 2013. Transfers from expatriate workers will remain unchanged. However, better absorption of European structural funds (greater number of projects) will help reduce the scale of the deficit. Foreign direct investments will fully cover the financing of the current account deficit. Along with projects related to the South Stream gas pipeline, many investors want to benefit from low Bulgarian wages. For example, Chinese companies are planning to penetrate the eastern European car market by building a plant in Bulgaria. In 2012, foreign exchange reserves (6 months of imports) exceeded their highest historical level and will continue to build up in 2013. This level is reassuring in the framework of the currency board (Lev pegged to the euro), transition to adopting the euro in the medium term. However, euro zone entry has been postponed in the light of the current crisis. Meanwhile, maintaining such a rigid exchange rate system has the disadvantage of making the real economy bear the whole adjustment in case of external shocks. On the other hand, public finances are prudently managed and one can expect deficit reduction to continue in 2013 in a context of contained public borrowing. A new tax is due to be introduced in 2013: interests on bank deposits will be taxed at 10%.
