Download PRESS RELEASE 13 February 2009 Today, the Bulgarian National

PRESS RELEASE
13 February 2009
Today, the Bulgarian National Bank released issue 4, 2008 of the quarterly Economic
Review, which gives an analysis of the major trends of development in the Bulgarian
economy, the impact of external factors and the expectations for the dynamics of economic
indicators in the country for 2009.
Here is a summary of this information:
The crisis in the international financial markets exacerbated in the fourth quarter of
2008 following the failure of Lehman Brothers in mid September and grew into a global
economic crisis. The real economic growth in the industrial countries slowed down
significantly with some of these falling into recession. The reduced global demand affected
raw material and fuel prices, which significantly declined. Inflation decreased considerably,
and so did inflation expectations.
The central banks reacted aggressively to the rapid slowdown (even decline in some
countries) of economic growth and falling inflation by significantly reducing their reference
interest rates. The expansion of the global financial crisis required new forms of intervention
by both central banks – via providing liquidity to money markets through standard operations
and various new refinancing programs aimed at discontinuing the drop in financial asset
prices, and governments – through urgent adoption of packages of fiscal measures in support
of the banking system and for promoting economic growth. The packages of measures
undertaken led to partial stabilisation of the financial markets; however the lack of confidence
among market participants continued to impede their normal functioning. The significant
slowdown of economic growth had an added impact on the risk-averse behaviour of banks,
which made the policy of sharp reduction of interest rates pursued by the leading central banks
largely inefficient. As a result, the financial markets displayed only limited signs of
stabilisation amid a low risk-taking propensity, lack of confidence, high volatility and
hampered transmission of liquidity injections into the real economy.
In Bulgaria, in January-September 2008 the real GDP growth rate was relatively high
(7%) compared to the same period a year ago. Investments in fixed assets contributed
considerably to growth and increased in real terms by 22.3% in the third quarter of the year.
Public Relations Division
1, Knyaz Alexander I Sq., 1000 Sofia, Bulgaria
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email: [email protected]
www.bnb.bg
On the other hand, over the same period the impact of the global economic crisis began to
show its effect on real economy indicators. The industry sector started decelerating its real
growth rate from 7.4% for the six-month period to 2% in the third quarter of 2008, probably
due to a slowdown in industrial export sales. Based on industrial sales data for October and
September this process deepened and expanded to most industry sectors.
In the last months of 2008 the conjuncture indicators of business fell sharply,
reflecting growing pessimism in the assessments of the current and especially the future
economic situation across all sectors of the economy. Based on this data, it could be expected
that in the first half of 2009 the enterprises will experience growing difficulties in placing
their products. The global economic crisis will shrink the external demand for Bulgarian
goods. The deteriorated international conjuncture will impact adversely the investment plans
of the enterprises in the country, and the slower income growth will deter household
consumption growth. As a result of the weaker external and internal demand, the expectations
are that real GDP growth rate will slow down significantly compared to 2008.
The foreign capital inflow into the country, over January-November 2008, stayed at a
high level. The EUR 10.9 billion surplus on the balance of payments financial account was
due to attracted foreign direct investments of EUR 5.27 billion, non-resident deposits with
local banks of EUR 2.48 billion and surplus on the balance of payments financial account in
net foreign liabilities of the non-bank private sector. At the end of 2008 the BNB international
currency reserves reached BGN 24 864.8 million (EUR 12 713.1 million). The average
monthly coverage of goods and services imports with BNB international reserves stayed at a
six-month level.
The continuing capital inflow into the country, even after a significant worsening and
destabilisation of the international financial markets since mid-September 2008, is an
indicator of sustained interest in investments in Bulgaria; still, the future dynamics of external
current, capital and financial flows to the Bulgarian economy in the first half of 2009 remains
highly insecure. This insecurity comes not from change of internal policy but from the still
unsurmounted turmoil in the international financial markets. The high level of openness of the
Bulgarian economy spills this insecurity over to the anticipated development of all key
macroeconomic indicators. We expect a positive net inflow of external financial resources to
the country also in the first half of 2009, most likely lower in the first two quarters of this year
than in the comparable period of 2008.
Inflation in 2008 reflected considerable fluctuations in the international prices of
foodstuffs and fuels. The strong decline in oil prices in the fourth quarter led to its sharp drop
in the end of the year. We expect that in the first half of this year inflation will continue to
moderate under the influence of the lower, as compared to 2008, international prices of fuels
and production raw materials.
Amid a quickly unfolding global economic crisis increasing the risks of decelerating
the economic growth in the country and hampering the access of economic agents to
financing, and with expectations for falling inflation, the BNB, within the range of
instruments at its disposal, undertook measures in support of the banking system and its
protection against the adverse effects of the global crisis. The amendments to Ordinance No.
21 on the minimum reserve requirements, which the banks maintain with the BNB, adopted in
the last quarter of 2008, aim to provide greater flexibility to the banks in managing their
liquidity, thereby limiting the fluctuations on the interbank market and helping the banks’
activities (for amendment to Ordinance No. 21 see the Box on p. 26). These measures are
continuation of the anticyclical policy pursued by the BNB.
As a result of the amendments to Ordinance No. 21, in the last quarter of 2008 a total
of circa BGN 1.8 billion of the banks’ funds, kept as reserves at the BNB, were released. After
the changes as of 1 January 2009, the system-wide average effective percentage rate of
minimum reserve requirements fell to around 7%, with the overall effect of BNB measures
being expressed in releasing liquidity of around BGN 3 billion. It should not however be
expected that releasing liquidity will automatically lead to higher levels of lending since the
current situation of insecurity significantly decreases the banks’ risk-taking propensity.