Economic studies
Bulgaria

Bulgaria

Population 7.246 million
GDP 53.698 US$ billion
B
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2011 2012 2013  2014(f)
GDP growth (%) 1.8 0.8 0.6 1.6
Inflation (yearly average) (%) 3.4 2.4 1.8  2.7
Budget balance (% GDP) -2.0  -0.5  -2.0  -1.8
Current account balance (% GDP)  0.1  -1.3  1.1 0.3
Public debt (% GDP)  15.4  17.6 18.5 19.0

 

(f) Forecast

STRENGTHS

  • Sound public finances
  • Resilient banking sector
  • Parity with the euro maintained by a currency board since 1997
  • Cheap labour

WEAKNESSES

  • Weak export industry
  • High vulnerability to external shocks
  • Social tensions exacerbated by political instability
  • Insufficient progress on governance

RISK ASSESSMENT

 

 

Growth sustained by domestic demand

Bulgaria’s economy has slowed sharply in 2013 due to low household consumption in a context of high unemployment (12.9% in September 2013) and sluggish credit growth since2010. In2014, the revival of private spending and of European demand (60% of exports) will support growth. The social movements, which began in February 2013, led to the cancellation of the electricity price rises adopted by the previous government (+13.8% in July 2012). Meanwhile, the government moved to increase social spending which will support household income.  Moreover, private workers remittances (7% of GDP) will remain stable after growing by 15% in 2013. The government plans to abolish taxes on fuel for the agricultural sector (6% of GDP), which is expected to continue performing well compared with the other sectors. To a lesser degree, copper mining (10% of exports of goods) will benefit from increased European demand.

Private investment is expected to recover in 2014, reflecting Russian investment in the South Stream gas pipeline (540km of the network on Bulgarian territory) and from better absorption of the EU Cohesion Fund.Bulgariahas in fact one of the lowest absorption rates inEurope(40%). Bulgarian companies are also expected to resume their investments after having built up sufficient precautionary savings. Their bank deposits represent 19% of GDP in 2013 against 15% for Hungary and 10% for Romania. Finally, inflation will increase in 2014 in line with dynamic domestic demand. However, a further fall in electricity prices cannot be ruled out after the Energy Minister’s announcements in late 2013, which could limit the price rises. 

 

Sound fiscal management and external accounts in surplus

The public finances are still prudently managed. However, in mid 2013, parliament adopted a measure to increase fiscal deficit from 1.3% to 2.0% in response to the social unrest. But the public debt remains low. More sustained growth in 2014 should make it possible to contain the budget deficit.

Regarding the external accounts, the current account balance is expected to remain in surplus in 2014. The balance of goods will post a deficit (8% of GDP), but the deficit has fallen appreciably since 2009 (12% of GDP) in a context of more sustained European demand. Moreover, expatriate workers’ remittances and improved absorption of European structural funds will help to meet the deficit. Meanwhile, foreign direct investments will benefit from the projects related to the South Stream gas pipeline, as many investors want to take advantage of low Bulgarian labour costs. For example, in 2012, the Chinese company GWN established a plant in the north of the country for the production of 50,000 vehicles for the United Kingdom and Italy (production planned for 2015). The country’s attractiveness is also guaranteed by the pegging of the Bulgarian lev to the euro by a currency board, since 1997.  This is the most rigid form of fixed exchange rate, with no allowance for fluctuation, each unit of national currency must be tied to its euro equivalent.  Foreign exchange reserves, equal to 8 months of exports, appear to be adequate.

 

Early parliamentary elections could be held in 2014

Protests began in February 2013 against electricity price rises and have force the Boiko Borissov’s government (GERB) to quit. The May parliamentary elections have led to the formation of a weak centre-right coalition. The alliance between the Bulgarian Socialist Party (BSP) and the Movement for Rights and Freedoms (MRF) actually holds only 120 of the 240 parliamentary seats, so it needs the tacit support of the nationalist Ataka party.  But the protests are continuing with demands for the resignation of a coalition dependent on the extreme right and which had to face two no-confidence votes in October 2013. Though the next parliamentary elections are not scheduled until May 2017, the holding of early elections seems possible in 2014. Meanwhile, adoption of the Ataka motion to extend the ban on land sales to foreign investors violates European principles. The constitutional court is, however, expected to invalidate the resolution, thus avoiding the country EU financial sanctions.

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