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Home > Reports By Country > Europe > Bulgaria
Bulgaria Business Forecast Report Q1 2010
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While it is likely that economic conditions in Bulgaria will stabilize during H209, we hold to the viewthat the economy will not enjoy a strong rebound in growth as experienced immediately after thedeep 1996-1997 recession. While inventory re-stocking may lend some support to the businesscycle, this will be a one or two quarter dynamic at best. Instead, we believe that the necessaryadjustment to the private sector’s balance sheet will pose a substantial impediment to growth overthe medium term. The consumer, in particular, will be unable to drive a swift recovery given thatunemployment is likely to continue heading higher even after the business cycle reaches its nadir.
In addition the rise in unemployment will see demand on social spending escalate, posing a difficultchallenge for Bulgaria’s new GERB-led government, which must tighten up the fiscal finances inorder to maintain investor confidence and prevent a fiscal crisis.
T he Bulgarian parliament approved new Prime Minister Boyko Borisov and his GERB-dominatedcabinet on July 27, with 162 MPs voting in favour and 77 against. Though we view positively theformation of a new reformist government with strong popular backing, we stop short of projectingsmooth and expeditious reform. Indeed, the road to convergence will remain a bumpy one,with risks to political stability still lurking. In particular, despite failing to win an absolute majorityin parliament, GERB has decided not to form a formal coalition with any of the rightist parties,instead choosing to rely on the tacit support of several smaller parliamentary parties. We caution,that while GERB currently benefits from support among the rightist minority parties, this is by nomeans guaranteed over the medium term, and as such will pose an underlying risk to both politicalstability and reform.
S ince we last wrote on the structural adjustment to Bulgaria’s balance of payments the currentaccount flipped into a EUR102mn surplus in July. This is the first time that the current accounthas posted a positive outturn since August 2005 and further supports our view that the balance ofpayments position is adjusting towards a more sustainable long-term equilibrium. On the back ofJanuary-July data the current account deficit has already reached 51% of our end-year target ofEUR3.86bn, suggesting that our projection remains broadly on track. We forecast the current accountdeficit to reach 11.3% of GDP in 2009, more than halving from the bumper 25.2% recordedthe previous year. Beyond this year we expect the current account deficit to decline further towards0.4% of GDP by 2013 and flipping into a 0.8% surplus in 2014.
T he Bulgarian government’s reluctance to devalue the lev against the euro, and the implicit internaldevaluation strategy which accompanies this policy, has seen consumer price inflation fall sharplysince the mid-2008 peak. The collapse of the real estate bubble, previously fuelled by foreign investors(particularly second home owners from Western Europe), has squeezed household incomeand exerted further pressure on asset prices through the wider economy. Indeed, house pricesfell 9.7% q-o-q in Q209 from -12.4% the previous quarter. In a similar vein, despite the recent andbuilding interest in Bulgarian equities on the back of the improvement in global risk appetite, stockprices remain far off their highs, with the SOFIX index still 75% off its 2007 peak. As such, we stillhold to the view that inflation will eventually run into deflation.
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