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MINISTRY OF FINANCE BULGARIA – ECONOMIC PERSPECTIVES Plamen Oresharski MINISTER OF FINANCE 10 December 2007 Sofia 2007 – RESULTS ACHIEVED Successful budget implementation and attainment of the fiscal targets – minimum 3,5 % positive budget balance Sound management of budget revenue – growth of around 20 % in the first year of membership Additional investment expenditure made Approved program documents – NSRF and OPs Prepayment of government debt and Agreement for Settlement of the Iraqi Debt– parameters favourable for both parties 2 2007 – ECONOMIC INDICATORS High and sustainable economic growth - above 6% Financial stability and high degree of confidence Prudent fiscal policy Continued reduction of unemployment rates Government debt – reduced to less than 20% of GDP FDI cover more than 100% of the current account deficit Inflation - above forecasted levels 3 7 6 5 4 Source: AEAF, EUROSTAT EU-25 4 Bulgaria (f) 20 07 20 06 20 05 20 04 20 03 20 02 20 01 3 2 1 0 20 00 percentage ECONOMIC GROWTH RATES ECONOMIC GROWTH 5,0 Agriculture Growth is driven by domestic demand: 3,0 High investment activity – favourable business environment and positive expectations 2,0 I .2 00 7 I.V 20 06 20 05 20 04 20 03 20 02 0,0 -1,0 -2,0 Source:NSI 5 Industry 1,0 20 00 Quickly growing consumption Services 4,0 20 01 Industry is the most dynamic sector of the economy (real growth of 9.1% for H107) INFLATION 12 Harmonized consumer price index 10 8 6 Internal factors include higher domestic demand and the rise of electricity prices. 4 2 0 1 '2006 6 Accumulated inflation end of October reached 8.5% mainly due to higher foodstuff prices resulting from droughts and the rise of international food and energy prices. 4 Source: NSI 7 10 1 '2007 4 7 Sales to non-residents made on the domestic market also account for part of the increase of foodstuff and catering 10 services prices. BALANCE OF PAYMENTS DEFICIT AND FDI Sources: BNB, AEAF Current account deficit FDI 4364 3935 2736 EUR mn 587 866 3807 3675 3103 2622 1851 1307 1103 903 761 855 980 972 402 1999 2000 2001 2002 2003 2004 2005 2006 I.-IX. 2007 PoB deficit covered by FDI and foreign reserve growth % FDI/BoP deficit (LHS) EUR mn Reserve (RHS) 150 12 000 9 000 100 50 6 000 147.6% 144.9% 105.6% 243.5% 190.3% 209.3% 118.4% 110.9% 103.6% 0 0 1999 2000 2001 2002 2003 2004 2005 2006 I.-IX.2007 Foreign trade accounts for the high current account deficit In the short term high FDI and EU Funds inflows will encourage imports; Exports, the basis whereof is expanding, are expected to rise in the coming years 7 3 000 10 FOREIGN DIRECT INVESTMENT Bulgaria’s accession to the EU and the improved business environment are important factors for FDI attraction Economic and political stability guarantee foreign investors’ interests The average annual FDI share in GDP is expected to be around 12-15% in the period 2008-2010 8 Foreign Direct Investment in Bulgaria EUR mn 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2001 2002 Total FDI 2003 2004 2005 Non-privatization share capital 2006 2007* Sources BNB, AEAF LABOUR MARKET (1) 3300 (thousand) % 25 3200 20 3100 3000 15 2900 2800 10 2700 2600 5 2500 2400 0 2000 2001 2002 employment 2003 2004 2005 2006 2007 I-IX unemployment rate Source: NSI 10 Higher employment and lower unemployment in the country. Rise of employment from 4.6% in the first nine months of 2007 y-o-y – creating new jobs in the private sector and increased level of economic activity. Downward trend of unemployment in the country – average drop to 6.6% for Q107. LABOUR MARKET(2) EU-25 Bulgaria Source: NSI, EUROSTAT 25 percentage 20 15 10 5 0 2000 11 2001 2002 2003 2004 2005 2006 2007H1 Unemployment is continuously dropping from around 19% in 2001 to around 7.4% in H107 – at present it is consistent with the average EU-25 unemployment levels. INCOME AND LABOUR PRODUCTIVITY Real labour productivity and wages growth, 2001=100 Source: AEAF, NSI 25% 20% 15% 10% 5% 0% 2002 2003 2004 Growth of labour productivity* 2005 2006 2007** Growth of real wages * GDP per person employed ** Forecast value In H107 GVA per employed person marks an accelerated real growth of 4.9% y-o-y. In the period 2002-2007 real wage has grown by 23.8%, labour productivity being 24%. 12 MONETARY POLICY TRENDS AND CURRENCY BOARD ARRANGEMENT STABILITY Maintaining the CBA stability until Eurozone accession while preserving the current exchange rate BNB foreign reserves ensure sufficient coverage of the monetary base 250 200 150 100 50 01 .1 .2 00 5 г. 01 .7 .2 00 5 01 г. .1 .2 00 6 г. 01 .7 .2 00 6 г. 01 .1 .2 00 7 г. 01 .7 .2 00 7 г. 0 Foreign reserves/Monetary base Sources: BNB, AEAF 13 BANKING SECTOR: DEVELOPMENT AND KEY CHALLENGES Enhancing financial intermediation Regulating commercial banks’ operations consistent with Basel II requirements Slowing down credit growth due to the administrative restrictions imposed by BNB (increasing the minimum reserve requirements as from September 2007) Keeping the good quality of bank credit portfolios Strengthening competition in the sector due to the integration of the banking system into the common European financial market 14 GOVERNMENT DEBT Government debt (% of GDP) 120 The prudent fiscal policy ensured gradual reduction of the government debt Source: MF 100 80 Considerable reduction of its servicing costs– from 4 % in 2000 to 1,1 % in 2007 60 40 20 .20 07 IX 20 06 20 05 20 04 20 03 20 02 20 01 20 00 19 99 19 98 19 97 0 15 MEDIUM-TERM FISCAL POLICY Main objectives: to contribute to the maintenance of economic stability and sustainable economic growth The medium-term fiscal policy will be consistent with the Stability and Growth Pact Budget balance within the Maastricht criteria while maintaining a budget surplus Avoidance of pro-cyclic policy Emphasis on the quality of public finance and EU Funds absorption The medium-term fiscal policy objectives are provided for in the Convergence Program of the country for the period 2007-2010 16 ECONOMIC POLICY COMMITMENTS Activating labour supply, improving labour market flexibility Public sector wages will not govern private sector behaviour Streamlining the number of persons employed in the public sector Improving business environment and adopting a Better Regulation Program Encouraging competition and improving market liberalization Prudent risk management in the financial sector 17 FISCAL CONVERGENCE – BUDGET SURPLUS Source: EUROSTAT 5 4 3 2 1 0 -1 -2 -3 2000 18 2001 2002 2003 2004 2005 2006 2007e FISCAL CONVERGENCE – GOVERNMENT DEBT LEVEL Source: MF, EUROSTAT 80% 60% 40% 20% 0% 2000 19 2001 2002 2003 2004 2005 2006 2007e CONVERGENCE OF LONG-TERM INTEREST RATES Source: AEAF, EUROSTAT 9 percentage 8 7 Reference value Bulgaria 6 5 4 3 2002 20 2003 2004 2005 2006 21 Source: AEAF, EUROSTAT 20 18 16 14 12 10 8 6 4 2 0 20 10 20 08 20 06 20 04 20 02 Bulgaria Reference value 20 00 19 98 percentage INFLATION CRITERION READINESS FOR EU FUNDS ABSORPTION The implementation of the National Strategic Reference Framework and the Operational Programs whereby it is implemented has been launched The European Commission officially approved NSRF on 22 June 2007 All OPs have been officially approved as of the beginning of November 2007 Pending approval of the Rural Development Program and OP Fisheries and Aquaculture Institutional and administrative capacity Audit and internal control systems; transparency of EU funds management 22 MINISTRY OF FINANCE THANK YOU! PLAMEN ORESHARSKI MINISTER OF FINANCE