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Bulgaria
Exit of convalescence
Following two years of political crisis amid sluggish growth, Bulgaria's political environment has stabilized since the legislative
elections of late 2014, and economic activity has started to strengthen. In this context, the center-right coalition government led by
Boiko Borisov has been able to introduce some structural reforms and pursue a fiscal adjustment program. The budget deficit soared
in 2014 as spending increased to respond to social demands and provide liquidity support to local banks; but it then narrowed
quickly and stood below 3% of GDP in 2015. In the banking sector, regulation is being improved and an asset quality review is
planned for 2016. Banks remain plagued by large non-performing loans, and credit is unlikely to rebound in the short term.
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Reform action in a stabilized political environment
Bulgaria experienced a period of political and social turbulence
following mass protests at the beginning of 2013, but the political
environment has finally started to stabilize after the snap elections
of October 2014. Since then, a center-right coalition government
has been led by Prime Minister Boiko Borisov, the leader of the
CEDB (Citizens for European Development of Bulgaria) and former
government head from 2009-2013. There are still some risks of
political instability going forward, because the ruling coalition may
gradually weaken given its complex structure, and parties will soon
prepare for the presidential election of October 2016. Moreover, the
Bulgarians’ disillusionment with the political establishment remains
significant. Nevertheless, in the more stable environment of the last
18 months, the government has succeeded in pursuing fiscal
consolidation efforts and accelerating a number of structural reforms,
despite the fragility of the coalition.
Reforms that have recently been introduced or are due to be
implemented shortly aim to start to improve the work of the
Supreme Judicial Council, reorganize the education system,
enhance efficiency in the electricity sector, and improve the health
and pension systems. The authorities have also taken steps to
strengthen the banking sector’s regulatory framework, with the
adoption of the Bank Recovery and Resolution Directive (aimed at
better handling crises), and plans to conduct an Asset Quality
Review (AQR) and banking system stress tests by the end of 2016,
with the support of the EU, IMF, and World Bank. Along with the
accelerated reform process, relations with the EU have improved. In
late 2014, the European Commission (EC) resumed payments to a
series of environment-related projects that had been suspended due
to problems in the public tendering process, and new investment
programs have been approved for the 2014-2020 funding period.
There is a consensus in Bulgaria on the need to enter the euro zone
in the long term. In the short and medium terms, the authorities
should remain strongly committed to preserving the Currency Board
Arrangement (CBA) and thus maintaining policy discipline.
Meanwhile, huge progress is still needed on the structural front.
Governance and corruption problems, and the poor efficiency of the
judiciary and the administration have long prevented Bulgaria’s
“institutional convergence” with the EU and contributed to its
incapacity to modernize infrastructure, thereby constraining its
economic development. Bulgaria remains the poorest country in the
EU, with GDP per capita (in PPP terms) at 47% of the EU average.
Yet the situation might begin to change if the reform efforts
underway since last year continue. A positive sentiment has also
recently emerged thanks to economic growth acceleration.
economic-research.bnpparibas.com
1- Summary of forecasts
2014
2015 2016f 2017f
Real GDP grow th (%)
1.7
2.8
2.6
Inflation (CPI, y ear av erage, %)
-1.6
-1.1
-0.5
1.2
Gen. Gov . balance / GDP (%)
-5.8
-2.8
-2.5
-2.3
Gen. Gov . debt / GDP (%)
27.0
30.0
32.0
33.1
1.2
2.0
1.5
1.2
Ex ternal debt / GDP (%)
89.1
95.6
98.0
92.0
Forex reserv es (USD bn)
21.9
22.8
22.9
23.0
6.7
7.7
7.5
7.3
Ex change rate BGN/EUR (y ear end)
1.96
f: BNP Paribas Group Economic Research forecasts
1.96
1.96
1.96
Current account balance / GDP (%)
Forex reserv es, in months of imports
2.6
2- Real GDP growth acceleration driven by exports
Year-on-year change, 4pma, %
— GFCF
▬ Exports
- - - Government consumption
▬ Private consumption
- - - Imports
█ Real GDP (rhs)
25
10
20
8
15
6
10
4
5
2
0
0
-5
-2
-10
-4
-15
-6
-20
-8
-25
-10
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source : National Statistical Institute
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Economic growth has gained some momentum
Real GDP growth remained slow in the post-crisis period, averaging
only 1.2% per year in 2010-2014. External demand from the main
European partners was sluggish and domestic demand remained
depressed, severely constrained by weak credit growth, high
unemployment (which soared from 5.2% in Q4 2008 to 13.0% in Q2
2013 before starting to decline), political instability, weak confidence
(aggravated by the crisis that hit two large local banks in 2014) and,
more generally, the poor quality of the doing-business environment.
Nonetheless, economic growth started to gain momentum in 2014
and this positive dynamics continued in 2015. Real GDP grew by an
estimated 2.8% last year, up from 1.7% in 2014. Domestic demand
growth showed small signs of recovery in 2014, but weakened again
Bulgaria
2nd quarter 2016
15
in 2015, given fiscal austerity measures and the continued process
of deleveraging in the private sector. Meanwhile, export growth
accelerated thanks to stronger demand from some EU partners and
depreciation of the euro and the lev, which helped support sales to
some non-euro zone countries (all EU countries represent 62% of
Bulgaria’s total exports and euro zone members 46%). Exports to
Greece and Russia declined (these countries represent 6.7% and
2.4%, respectively, of total exports). At the same time, Bulgaria’s
banking sector has well weathered contagion effects from the Greek
crisis. Bulgaria also benefited from the greater use of EU funds,
which helped stimulate public domestic demand in H2 2015. In
addition to the resumption of EU payments that had been
temporarily suspended, Bulgaria received “ordinary” funding from
the 2014-2020 period plus “exceptional” funding from the 2007-2013
fiscal period (that had to be fully used before end-2015).
3- Credit to the private sector still down
We project real GDP growth at 2.6% in 2016. Negative forces will
persist, including a tight fiscal policy, the absence of recovery in
credit growth, and the region’s difficulties that will still weigh on
export performance. EU-funded projects are expected to remain
growth-supportive, but could decline following last year’s
exceptional payments. On the positive front, households should
start to take advantage of lower energy prices and improving labour
market conditions (the unemployment rate fell to 8.8% at end-2015).
2003
Source : IMF
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Fiscal consolidation should continue
Fiscal performance deteriorated significantly in 2014 as the result of:
i) revenue underperformance and higher spending given the tense
social context and anti-austerity protests of 2013, and ii) the
inclusion of additional liabilities due to the need to support the
Bulgarian Deposit Insurance Fund (BDIF) following the deposit run
that hit two local banks in mid-20141. The 2014 fiscal deficit was
finally estimated at 5.8% of GDP by the EC. As the jump in the
deficit was primarily due to one-off support to the financial sector
and inclusion of BDIF in the general government sector was
considered exceptional, Bulgaria has not been placed under any
Excessive Deficit Procedure by the EC. Moreover, the government
has rapidly taken actions for fiscal consolidation. It plans to reduce
the fiscal deficit each year from 2015 to 2018, on the back of
stronger revenue growth (including improved tax administration) and
a limited rise in expenditure (while still remaining cautious on the
social spending front). The fiscal deficit fell to less than 3% of GDP
in 2015 and should decline to 2.5% in 2016. In the medium term,
effective reforms in the healthcare, pension and energy sectors
should also help improve control of public spending and support
fiscal consolidation.
Government debt ratios also deteriorated sharply in 2014, rising to
27% of GDP in 2014 from 18% in 2013. This resulted from growing
financing needs to cover the larger fiscal deficit and one-off items,
as additional debt was issued to support the financial sector
(liquidity scheme and payment of guaranteed deposits by the BDIF).
The surge in debt was entirely absorbed by the issuance of new
debt in foreign currency. At end-2014, 79% of government debt was
denominated in foreign currency (almost exclusively euros), up from
66% in 2013. And 55% was held by foreign investors (vs. 44% in
2013). In 2015, in a stronger real GDP growth but deflationary
1
See "Bulgaria: A wave of panic”, EcoEmerging, July 2014.
economic-research.bnpparibas.com
█ Credit, % of GDP (lhs) ▬ Loans to corporates, annual change, % (rhs)
- - - Loans to households, annual change, % (rhs)
70
120
60
100
50
80
40
60
30
40
20
20
10
0
0
-20
2005
2007
2009
2011
2013
2015
environment, the government debt-to-GDP ratio increased slightly to
30%. Similar dynamics are expected in 2016.
Compared with two years ago, sovereign risk has slightly
deteriorated due to the new contingent liabilities that have emerged
in the banking sector and the rise in government debt ratios.
However, it remains moderate and public finances still seem strong
enough to absorb a shock. Sovereign risk remains supported by:
still moderate government debt ratios, large fiscal reserves (about
12% of GDP), and the strong consensus on the need to maintain
prudent fiscal policies. Sound public finances are a key requisite for
the sustainability of the CBA, which itself is vital for sovereign
solvency since government debt is mostly denominated in euros.
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Domestic credit conditions not yet growth-supportive
Under the CBA, Bulgaria’s monetary policy is tied to that of the ECB.
It has been accommodative since 2009 and will remain so in the
short term. The main policy rate has been close to 0% for the last
three years and the nominal lending rate has decreased gradually.
Due to deflation (which has been persistent since August 2013), real
lending rates have increased. However, whatever the monetary
policy stance, domestic credit has been driven in recent years by
the continued deleveraging process in the economy, as corporates
have limited their debt growth and banks have reduced their
external liabilities. As a result, domestic bank credit to the private
sector has barely increased since 2009 (by 0.4% per year on
average). It declined as a percentage of GDP from 71% in 2009 to
59% in 2015. Domestic credit growth is projected to be close to 0%
in 2016, especially as banks should remain prudent in the
preparation for stress tests and the AQR. The high level of nonperforming loans (estimated at 20% of total loans in Q3 2015)
remains the Achilles’ heel of Bulgarian banks. The sector’s
capitalization is adequate, even though it could be dented by
potential new credit losses that may arise following the AQR. The
sector’s funding profile is also comfortable. While liquidity pressures
remain possible, in the event of a confidence shock (like in mid2014) or as the result of the presence of Greek banks (12% of total
domestic assets), the risk is lessening thanks to a strengthening in
supervision.
Christine Peltier
[email protected]
Bulgaria
2nd quarter 2016
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