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Bulgaria

Bulgaria

Population 7.1 million
GDP 6842 US$
A4
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Synthesis

major macro economic indicators

  2014 2015  2016 (e) 2017 (f)
GDP growth (%) 1,3 3,6 3,4 2,9
Inflation (yearly average) (%) -1,6 -1,1 -1,3 1,3
Budget balance (% GDP) -5,5 -1,6 -0,0 -0,4
Current account balance (% GDP) 0,1 0,4 4,2 2,4
Public debt (% GDP) 27,0 26,0 29,5 26,8

 

(f) Forecast

STRENGTHS

  • Fixed parity with the euro (1 euro = 1.96 lev) backed up by large foreign currency reserves
  • Diverse productive base
  • Low production costs: good competitiveness
  • Low public debt
  • Numerous tourism assets

WEAKNESSES

  • Governmental instability, fragmented political landscape and proximity to the business world
  • Corruption and organised crime
  • Mediocre effectiveness of public services and justice (influence of the business world)
  • Inconsistent use of European structural funds
  • Still-insufficient supervision of the banking sector
  • Lack of skilled labour and high long-term unemployment (61% of the total)
  • Low proportion of rural dwellers, Roma and older people in the active population
  • A relatively poor (GDP per capita = 45% EU average) and declining population
Moderate growth underpinned by domestic and foreign demand

Despite the return of inflation, household consumption will probably remain the main driver of growth. Their incomes are boosted by the lack of skilled labour, resulting from both inadequate training and emigration. The rise in the minimum wage and in employment, particularly in manufacturing and retail, are also having a positive impact. Thanks to the upturn in lending in the 2nd half of 2016, in the wake of the results of stress tests confirming the consolidation of the banking sector, private investment should continue to grow. After falling because of the transition between two European funding programmes, public investment seems set to rise again. However, there are still scars from the excesses and the associated overindebtedness, culminating in the bankruptcy of the country's fourth-largest bank in 2014, and they will encourage households and businesses to be prudent. Exports, which are diverse, encompassing cereals, oleaginous products, tobacco, clothing, medicines, machines, metals and electricity, should maintain their moderate rate of growth. They are still competitive, because salaries, despite having risen more than productivity since 2013, remain low. Nonetheless, with imports buoyed by the resilience of domestic demand, the positive contribution made by foreign trade might fall.

 

Solid public and foreign accounts, but costly state-owned companies

Despite the bank rescue of 2014-2015, the level of public debt remained modest. The rise of 2016 can be explained by prefinancing which increased state reserves. Thanks to the low deficit, which is scheduled to disappear by 2020, and growth higher than the average interest rate, debt will probably fall. After a significant decrease in 2016 owing to a rise in excise taxes and a reduction of public investment related to the transition between the two European financing programs, public deficit is expected to slightly increase given higher spending (rise in pensions and teachers’ wages) planned in the government agreement adopted in May 2017 and the resumption of investment. There is considerable room for improvement. The shadow economy is estimated at 30% of the total economy. State-owned companies (electricity, railways, post office, water) generally post mediocre performances and some are loss-making. Their debt is significant, but, for the most part, it is not backed by state guarantees. The national electricity company (NEK) is a victim of under-pricing and has debt equivalent to 8% of GDP. It should benefit from an interest-free government loan equivalent to 1.4% of GDP to compensate a Russian manufacturer for the cancellation of the Belene nuclear power station. In this event, the deficit and public debt would rise by the same amount. Public sector reforms would be a way of increasing public investment, which accounts for just 6% of GDP, despite the delays in road infrastructure projects and the European contribution.

Despite the good price competitiveness of its exports, in 2016 the country had a trade deficit of 3.8% of GDP, which is likely to increase given strong domestic demand and a climb up of energy prices. This can be explained by its energy dependency: 35% of needs are met by foreign sources, including 11% by Russia (all its gas) and the need to import capital goods. This deficit has been more than offset by the surplus in services (7.2% of GDP) thanks to road transport and tourism centred on the Black Sea beaches which could however decrease with the rise of holidays abroad of the Bulgarian population. Moreover, remittances from expatriates and European subsidies (3.4%) have offset the repatriation of dividends by foreign investors and the payment of foreign debt interest (these two items account for 2.5% of GDP). The current account surplus, European funds and direct inward investment allow Bulgaria to boost its foreign currency reserves, the abundance of which (more than 11 months of imports) lends credibility to the pegging of the lev to the euro, while also servicing foreign debt, which amounted to 70.2% of GDP (at the end of March 2017), is falling, and is mainly payable by businesses, with intragroup loans alone accounting for one third.

 

Political instability hinders reforms

Prime Minister Boyko Borisov resigned following the defeat of the candidate he backed in the November 2016 presidential elections. His centre-right party, Citizens for European Development of Bulgaria (GERB), nevertheless captured 32.5% of the votes in the early parliamentary elections held on March 26th 2017, whereas the Bulgarian socialist party almost doubled its 2014 score, reaching 27%. Prime Minister Boiko Borissov was thus forced to form a coalition with the United Patriots, which won 9% of the votes by bringing together three ultra-nationalist parties, including the pro-Russian extreme-right Atalka. Obtained at the cost of budgetary concessions and vulnerable to divergences over the foreign policy, the relative stability of the coalition should, however, persist at the expense of major reforms, confirming the constant reliance of the two main parties on the good will of multiple small groupings.. The frequency of early elections is an additional factor of instability, especially as the voters begin to signal their weariness with their relatively low living standards, inequalities sustained by a 10% flat tax, corruption, organised crime and vote buying.

Last update : June 2017

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