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BULGARIAN ECONOMY ON THE ROAD TO EUROPEAN UNION AND ECONOMIC AND MONETARY UNION IVAN ISKROV GOVERNOR BULGARIAN NATIONAL BANK 14 July 2006 Athens OUTLINE • INITIAL CONDITIONS AND TRANSITION PROCESS • MACROECONOMIC AND FINANCIAL FRAMEWORK • ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES • EU AND EMU PERSPECTIVES • REGIONAL PERSPECTIVES 2 INITIAL CONDITIONS AND TRANSITION PROCESS • Planning economy with lack of functioning markets • Bulgarian economy was highly integrated within Council for Mutual Economic Assistance • Economy was not subject to competitive pressure • Distorted incentives • Transition was a unique process without historical experience to draw from • Political consensus on society’s priorities was a key prerequisite for successful transition 3 MACROECONOMIC AND FINANCIAL FRAMEWORK • Euro-based currency board since mid 1997 • Prudent and predictable fiscal policy oriented towards balanced budget or surplus • Withdrawal of the state from the business through large scale privatization of the state owned enterprises • Liberalization of the markets – free movement of goods, services and capital • Government policy oriented towards improvement of investment climate 4 GENERAL GOVERNMENT BALANCE 4 3 % of GDP 2 1 0 -1 -2 Maastricht criterion -3 -4 1999 2000 2001 2002 2003 2004 2005 5 GOVERNMENT DEBT 90 80 70 Maastricht criterion % of GDP 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 6 EMBI+ Bulgarian Sovereign Spread 14/4/06 14/1/06 14/10/05 14/7/05 14/4/05 14/1/05 14/10/04 14/7/04 14/4/04 14/1/04 14/10/03 14/7/03 14/4/03 14/1/03 14/10/02 14/7/02 14/4/02 14/1/02 14/10/01 14/7/01 14/4/01 14/1/01 14/10/00 14/7/00 14/4/00 BULGARIAN SOVEREIGN SPREAD 1200 1000 800 b.p. 600 400 200 0 EMBI+ Emerging Market Spread 7 REAL GDP GROWTH 6 5 4 % 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 8 FOREIGN DIRECT INVESTMENTS IN BULGARIA 16 14 % of GDP 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 9 REAL GROWTH OF GROSS FIXED CAPITAL FORMATION 25 20 15 % 10 5 0 1999 2000 2001 2002 2003 2004 2005 10 SHARE OF THE GROSS CAPITAL FORMATION IN GDP 30 25 % of GDP 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 11 GROWTH OF THE REAL GDP PER PERSON EMPLOYED 10 8 6 4 % 2 0 -2 -4 1999 2000 2001 2002 2003 2004 2005 12 GROWTH OF THE UNIT LABOUR COSTS 10 8 6 % 4 2 0 -2 -4 -6 -8 1999 2000 2001 Nominal Unit Labour Costs 2002 2003 2004 2005 Real Unit Labour Costs 13 EMPLOYMENT GROWTH 8 6 4 % 2 0 -2 -4 1999 2000 2001 2002 2003 2004 2005 14 UNEMPLOYMENT RATE 25 20 15 % 10 5 0 1999 2000 2001 2002 2003 2004 2005 15 ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES • High consumption and investment growth • Dynamic credit growth • External imbalances • Limited scope for policy reaction of the central bank • Limits of conservative fiscal policy 16 REAL GROWTH OF CONSUMPTION 10 9 8 7 6 % 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 17 SAVINGS AND INVESTMENTS BALANCE 5 % of GDP 0 -5 -10 -15 -20 1999 Current Account 2000 2001 2002 Government "S-I" Balance 2003 2004 2005 Private Sector "S-I" Balance 18 EXTERNAL POSITION 0 % of GDP -5 -10 -15 -20 -25 1999 2000 2001 2002 Current Account Balance 2003 2004 2005 Trade Balance 19 CREDIT TO THE PRIVATE SECTOR 50 45 40 % of GDP 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 20 GROWTH RATE OF THE CREDIT TO THE PRIVATE SECTOR 60 50 40 % 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 May-06 21 EU AND EMU PERSPECTIVES • BNB and Government signed in 2004 an agreement that defines the strategy for Euro adoption • Joining Exchange Rate Mechanism II immediately after EU membership • Maintaining unilaterally currency board at the current exchange rate – BGN 1.95583/EUR 1 • Bulgarian economy is in good position to fulfill Maastricht criteria • Inflation criterion is a challenge 22 LONG-TERM INTEREST RATES 9 8 7 Maastricht criterion 6 % 5 4 3 2 1 0 2002 2003 2004 2005 23 AVERAGE INFLATION 12 10 8 6 4 2 0 -2 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00 Jul-99 -4 Jan-99 % Inflation Maastricht inflation criterion Inflation excl Administrative Prices and Excise Tax Effects 24 REGIONAL PERSPECTIVES • Greek business and politicians extended consistent support to economic and political reforms in Bulgaria • Greek economy has very strong ties with Bulgarian economy through trade of goods and services and direct investments • The accession of Bulgaria and Romania in EU opens economic opportunities for the Balkans that our region have never had in its history 25 GEOGRAPHICAL STRUCTURE OF FOREIGN TRADE (2005) All 6% EU 4% 10% 23% 9% 10% 4% 52% 14% 5% 6% 15% 19% 9% 13% EUROPEAN UNION BALKAN COUNTRIES OTHER EUROPEAN COUNTRIES (incl Russia) ASIAN COUNTRIES AMERICAN COUNTRIES OTHER GERMANY GREECE BELGIUM UK NEW MEMBER STATES ITALY FRANCE SPAIN OTHER OLD MEMBER STATES 26 GEOGRAPHICAL STRUCTURE OF THE EU’s FDI IN BULGARIA All EU 12% 18% 5% 35% 6% 7% 7% 82% EU REST OF THE WORLD 7% 12% 8% AUSTRIA GERMANY NETHERLANDS GREECE ITALY UK CYPRUS BELGIUM Rest of EU 27