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Bulgaria - Economic Situation
July 2004
Edi Segura, Oleg Ustenko
Summary
Since the beginning of the year, the Bulgarian economy has continued to expand at a
healthy rate. In the first quarter of 2004 (Q1), gross domestic product grew by 5.3%
year-over-year (yoy), supported by a sharp rebound in industry and services. During
the first five months of 2004, the government maintained prudent fiscal policies. The
general budget showed a surplus of 1.9% of the projected GDP, which compares
favorably with a targeted full-year deficit of 0.7%. The upsurge of world oil prices
triggered an acceleration of consumer price inflation, which reached 7.3% yoy in
June. On the back of rapid imports growth, the merchandise trade deficit continued to
deteriorate, widening by 42.9% yoy to 4% of projected full-year GDP in JanuaryApril. Over the period, the current account deficit, however, narrowed by 3% yoy to
EUR 734 million due to growing inflows from tourism and current transfers. Though
the current account deficit is relatively high, it is more than offset by foreign direct
and other investment inflows. On July 8, 2004 Bulgaria came to an agreement with
the IMF on a precautionary stand-by arrangement to provide support for the country
until it joins the European Union in 2007. In mid-June Bulgarian government
completed the negotiations with the EU that confirmed the year 2007 as the date for
Bulgaria’s accession to EU.
Economic Growth
In first quarter of 2004 (Q1), economic
growth in Bulgaria reached a high level
of 5.3% yoy.
The acceleration of
economic growth was caused by a
rebound in Bulgarian industrial and
service sector.
Real GDP and Real Growth by
S ectors, % yoy
8
6
4
Value added growth in industry reached
2
6.4% yoy in Q1, which compares very
0
favorably with 5.7% yoy over the same
Q1Q2Q3Q4Q1-2
period last year.
Industrial sales
2003
2003
2003
2003
2004
expanded by 21.1% yoy in April, a
Agriculture
Industry
growth rate which is 2 percentage points
Services
GDP
higher than the one recorded a month
ago.
At the product level, food Source: Bulgarian National Statistical Institute
processing,
wood
and
furniture
production demonstrated the highest rates of growth during the month. Sales in the
food processing industry increased by 12.1% yoy, primarily due to a substantial
increase in food prices (7.0% yoy) and particularly in alcohol drinks and tobacco
(28.1%). In April, strong increase in the domestic production of wood (68.0% yoy)
and furniture (36.5% yoy) leaded to 1.6% yoy decrease in prices for these products on
the domestic market and increase in the value of these products’ export.
In Q1 Bulgarian service sector grew at 6.2% yoy level. Agriculture showed the lowest
level of growth among other sectors (1.2% yoy). The slow rate of growth in this
sector negatively affected the cumulative rate of growth of the whole economy.
Based on Bulgaria’s economic performance in the first quarter of 2004, the
government revised its GDP growth forecast from 5.3 to 5% for this year. The
medium- term macroeconomic projection continues to rely on growth rate somewhat
above 5% in 2005 and 2006.
Fiscal Policy
Supported by robust economic growth fiscal performance has been successful. In
January-May, the general fiscal budget posted a surplus of Lev 710 million (EUR 363
million). The figure accounts for some 1.9% of the projected GDP while the
government is targeting a full-year deficit of 0.7%.
Over the period, consolidated budget revenues reached Lev 6.38 billion (EUR 3.24
billion), while expenditures amounted to Lev 5.67 billion (EUR 2.88 billion). Good
performance of the economy in the first five months of the year supported a 3% yoy
growth of budget revenues. Budget expenditures also increased but the rate of their
growth was lower than revenues (2.5% yoy).
The large fiscal surplus in April and May had a symmetric upward impact on the
stock of the fiscal reserve, which rose from EUR 1.15 billion at the end of April to
EUR 2.37 billion at the end of May. This increase will have a downward impact on
the money supply and would tame the inflation rate.
In the middle of May the Ministry of Finance presented the draft of the 2005-year’s
budget. It includes a 5% wage hike in the public sector and 4.5% pension hike. The
draft fiscal parameters look consistent with the broad objectives for reduced fiscal
intermediation and planned tax cuts. The wage and pension hikes are relatively tight
given the projected inflation rates and the rate of economic growth.
During January-April 2004,
the amount of public debt
(internal and external)
increased by 4.02% from
EUR 8.51 billion at the end
of 2003 to EUR 8.86 billion
at the end of April 2004.
The monthly rate of growth
in April was 1.03%. The
total stock of the public
internal and external debt
of the end of April can be
translated into 48% of the
forecasted GDP in 2004.
Public Debt Dynamics in 2002-2004 eop, billion
EUR
Internal
Debt
12
10
External
Debt
(public
and
private)
Governme
nt
External
debt
8
6
4
2
0
2002 Q1- Q2- Q3- Q4- Q1- Apr03 03 03 03 04 04
Source: Bulgarian National Bank
The increase is mainly attributed to increase in interest rate for some part of
previously issued debt instruments and the currency value in which they were
denominated.
Rapidly growing liabilities in the private sector have pushed up the gross external
debt by 6.1% yoy to EUR 11.4 billion as of end April. The private debt accounted for
35% of the gross external debt of Bulgaria. As of end April, the external debt
accounted for 59% of the forecasted full-year GDP. This increase in private
borrowing is due to improved access of the private sector to external financing.
Monetary Sector
Starting December 2003, inflationary
pressures in the consumer market
began to fade away. During June 2004,
the consumer price index (CPI) fell
1.8% on a month-over-month basis,
after it was close to zero in May.
However, on an annual basis the
consumer prices growth accelerated to
7.3% yoy in June compare to 6.8% yoy
in May. Higher oil prices seen in the
group of non-food products and a new
rebound in the service prices
contributes for the accelerated inflation
rate. On the other hand, the annual
index in the group of food prices
slowed to 7% yoy in May relative to
7.8% yoy in April. Despite the overall Source: Bulgarian National Statistical Institute,
price rebound in June, it should be Bulgarian National Bank
expected that CPI inflation may ease
down in the second half of the year due to the high base from the fall of last year and
signs of positive supply shocks in the agricultural and food sectors. The year-average
inflation however is likely to stay around 5-6% that would exceed the figures used in
the budget projections for this year and would generate higher than projected fiscal
revenues.
Change in official foreign reserves, EUR mn
400
300
200
100
-200
-300
-400
Source: Bulgarian National Bank
Apr'04
Jan'04
Sep'03
May'03
Jan'03
-100
Sep'02
0
May'02
At the same time, producers’
inflation
continued
to
accelerate. The producers’
price index (PPI) in the
industry
increased
significantly in April to 6.3%
yoy from 1.4% yoy a month
before. It should be expected
the PPI will rebound, as the
industry is more sensitive to
external oil price shocks.
Monetary aggregates growth slightly decelerated in May as money supply (M3)
growth fell to 1.23% mom from 2.28% mom in April. Money supply growth
slowdown was attributed to some deceleration of credit growth. The growth of credit
to non-government sector slowed down to 50.8% yoy in April from 52.3% yoy. . With
the aim to reduce credit growth, the monetary authorities transferred government
deposits in commercial banks to the central bank, thus reducing banks liquidity. Also,
starting July 1, 2004 the minimum reserve requirement of 4% was imposed on
financial instruments with medium and long-term maturities. Significant upsurge of
commercial bank credit, especially of consumer lending, triggered an increase of
import demand thus implying further widening of external gap. In an attempt to
stimulate economic growth, the Bulgarian National Bank (BNB) put down its base
interest rate to 2.44% in May per annum from 3.83% month before.
In July, the Bulgarian official foreign reserves increased 30% yoy to EUR 6.2 billion
supported by robust inflow of foreign direct and portfolio invetsment in the first half
of 2004. However, the BNB’s end-year target for gross reserves equals to EUR 5.7
billion because of expected interest payments on external obligations and relatively
large current account deficit.
International Trade and Capital
25.0%
Exports
of goods
and
services
20.0%
15.0%
10.0%
Imports
of goods
and
services
5.0%
04
03
Q
120
03
Q
320
02
Q
120
02
0.0%
Q
320
The annualized CA gap has slid from
9.1% of GDP in the 12 months ending
on March 31 to 8.2% in the 12 months
ending on April 30. The whole
improvement is recorded in one month,
as the CA deficit has dropped by 40.2%
to EUR 217.8mn in April. The foreign
trade deficit continued to deteriorate,
widening by 42.9% yoy in Jan-Apr and
6.2% in April.
Change in export-import qoq, %
Q
120
In January-April 2004 the Bulgarian
current account (CA) deficit was EUR
735.8 million, which is 2.6% lower than
at the same period in 2003. The deficit
accounts for 3.8% of the projected fullyear GDP relative to 4.3% a year ago.
Source: Bulgarian National Bank
On the other hand, growing inflows from tourism and current transfers, as well as
lower income transfers to non-residents, have contributed to the overall narrowing of
the CA deficit. Larger tourism inflows and lower energy imports in the summer
months would bring favorable seasonal effects in the following months until the end
of September. This would most likely translate into a CA surplus in Q3. However, the
annualized figures may not sustain the positive shift in April, as the oil price effects
would have significant upward impacts on the merchandise imports in May and June.
In January-April, the balance of the merchandise foreign trade netted a deficit of EUR
776.6 million. The gap widened by 43% yoy in euro terms and accounted for 4% of
the projected full-year GDP. The export growth rate improved from 6% yoy in March
to 10.8% yoy in April. Over the period of January-April, import grew faster than
export (13.9% yoy). The import statistics show a slight deceleration in the growth rate
in April against March but the 3-month moving average is indicating rapid expansion
rates for both import and exports that are likely to keep the foreign trade gap at a
record high-level this year. The trade balance would start to improve seasonally on a
monthly base in the summer months but the annual indices will continue to pose
concerns on the external balance.
The geographical breakdown of the foreign trade shows that the exports to EU 15
grew by 10.6% yoy in January-April or nearly two times faster than the overall rate.
The export performance regarding the countries in Central and East Europe was even
more impressive marking a rise by 23.9% yoy for the same period.
Despite the deficit in the CA, the
overall balance of payments netted a
surplus of EUR 33.8 million in
January-April against a deficit of EUR
2.9 million for the same period last
year. In January-April, the net inflows
of FDI rose by 2.2% yoy to EUR 401.9
million and the final payments for the
privatization of the telecom company
BTC will boost further the foreign
investment statistics by more than
EUR 200million in June.
Net FDI flows, million EUR
450
400
350
300
250
200
150
100
50
0
-50 Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q102 02 02 02 03 03 03 03 04
The state investment agency has Source: Bulgarian National Bank
upgraded the forecast for FDI inflows
this year from $1.6 billion to $2 billion (some 7.5% of the projected GDP). The
structure of the expected investments comprises: $565 million from privatization
inflows, $415mn from investment expansion, and $1.02 billion from green-field
projects. Bulgaria is about to be included in a global investment index for 42 countries
that would also support the inflows of FDI.
International Programs
On July 8, 2004 the IMF and Bulgaria came to an agreement on a stand-by
arrangement to provide support for the country until it joins the European Union in
2007. Bulgaria wishes the agreement to be only a precautionary stand-by
arrangement under which the IMF would provide credit to Sofia only if the country
was in desperate need. Under the provisions of the agreement, Bulgaria could draw
on $130-140 million (EUR 106-114 million) in IMF funds. In exchange, Bulgaria
would have to push ahead with IMF-imposed austerity measures. A two-year stand-by
arrangement for $300 million agreed upon in 2002 expired in February.
On June 10, 2004 a loan from the World Bank to Bulgaria in the amount USD150
million was approved. This loan intends to sustain reforms across diverse sectors of
Bulgaria’s economy while supporting the execution of the government’s reform
agenda. This program’s main objectives are: to achieve average annual growth rates
of 4.5-5.0% during 2002-05; to reduce the poverty rate by half by 2005 compared to
2001; and to reduce the unemployment rate from 18.1% in 2001 to 12-14% in 2005,
while making substantial progress towards EU accession.
The EBRD remains one of the most active international financial institutions in
Bulgaria. It has established a private sector financing program in Bulgaria. The Bank's
activities and portfolio have increased considerably over the last 24 months, as a
result of the positive improvements in the country. The Bank is a foremost catalyst for
investment in Bulgaria (collective business volume of EUR 784.2 million as part of
total funds mobilized of EUR 3.2 billion) and is positioned to play a fundamental role
in guiding the country through the challenges ahead. The purpose is to wholly and
proactively support Bulgaria by further encouraging the expansion of the private
sector and increasing activities in infrastructure.
Other Developments
Bulgaria has consistently continued the implementation of the Europe Agreement
which set the terms of accession to EU in 2007. No major issues that could
jeopardize this target date are currently envisaged. Consequently, the European Union
leaders recently confirmed the year 2007 as the date for Bulgaria’s accession to EU.
The leaders of EU 25 member states voiced content with the completion of Bulgaria's
entry talks.
Bulgaria’s political situation has remained stable over the past year. The protocol for
Bulgaria’s accession to NATO was signed in March of 2003 and the country was
officially recognized as a NATO ally on April 2, 2004. Bulgaria actively continues to
fulfil the statutes of the Copenhagen Political Criteria.
Standard & Poor's Ratings Services assigned an investment grade to Bulgaria, the
tenth sovereign currently rated by the agency that has made the transition from
speculative grade to the investment grade. The agency raised its foreign currency
sovereign credit ratings on Bulgaria to BBB-. The long-term local currency credit
rating is raised by one notch to BBB while the short-term ratings for both local and
foreign currency are placed at A-3. The outlook on all ratings is stable.