Economic studies
Bulgaria

Bulgaria

Population 7.2 million
GDP per capita 7,751 US$
B
Country risk assessment
A4
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Synthesis

major macro economic indicators

  2013 2014 2015(f)  2016(f)
GDP growth (%) 1.3 1.5 1.7 1,9
Inflation (yearly average) (%) 0.4 -1.6 -0.8 0.6
Budget balance (% GDP) -0.8 -5.8 -3.0 -2.8
Current account balance (% GDP) -0.5 0.7 1.2 1.2
Public debt (% GDP) 17.6 26.9 31 32

 

(f) Forecast

STRENGTHS

  • Fixed exchange rate against the euro (1 euro =1.96 lev)
  • Diversified production base
  • Low production costs
  • Low dependence on external energy
  • Many tourism assets

WEAKNESSES

  • Governmental instability and fragmentation of the political landscape
  • Corruption and organised crime
  • Inefficient public administration and judicial systems
  • Inadequate supervision of the banking sector
  • Lack of skilled labour force
  • Population relatively poor (per capita GDP = 45% of EU average) and in decline

RISK ASSESSMENT

2016, confirmation of a modest recovery

The 2015 recovery should be confirmed in 2016. With the return to government stability and consolidation of the banking sector, confidence is returning. However, traces of excesses, which culminated in the bankruptcy of the country's fourth-largest bank in 2014, will still be present. The desire to pursue deleveraging, the probable continued reduction in credit and the prospects of budgetary tightening will urge households and businesses to exercise caution. Public investment could slow down due to the progressive availability of new European structural funds under the programme for 2014-2020. The European Commission will remain watchful as to the manner in which the contracts are awarded. Exports, diversified with cereals, sunflower seed, tobacco, clothing, medicines, machinery, copper, steel, electricity and refined oil, are expected to post continued moderate growth. On the one hand, they should benefit from the good performance of the German and Turkish markets and from increased Italian, Rumanian and French demand; on the other hand, they are suffering from the poor performance of the Greek economy. The disaffection of Russian visitors to the Black Sea coast will hit tourism revenues.

 

A gradual return to budgetary orthodoxy

The public deficit is expected to drop back to below 3% in 2016. The authorities will have a hard task on their hands, given the losses of State-owned companies (electricity, railways, postal services, water) and average quality tax collection impaired by a grey economy estimated at 30% of the total economy. The squeeze is not likely to be too rapid, as the current Prime Minister, Boiko Borisov, had to step down in 2013 against a background of popular discontent triggered by electricity price rises, while the previous government lasted only briefly. This notwithstanding, electricity market reforms were introduced, accompanied by price rises and the scrapping of subsidised tariffs for the purchase of electricity produced by new, renewable energy installations. For its part, the inflated hospital sector has undergone restructuring. Because of the significant and persistent deficit, the public debt will continue to rise but its low level, despite the cost of the bank rescue in 2014, will mitigate the increased burden.

 

Balanced external accounts

Despite the good price competitiveness of its exports, the country has a trade deficit representing about 7% of GDP. This is down to its energy dependence: 35% of its needs are covered externally, of which 11% by Russia (which supplies all the gas). This deficit is balanced by a trade in services surplus, together with tourism and road transport. Meanwhile, dividend repatriation by foreign investors and interest payments on external debt are broadly offset by remittances from emigrants, many of whom left for the west after the borders were opened, as well as by new foreign direct investments, the stock of which amounts to 110% of GDP. This helps top up the foreign exchange reserves and ensure the credibility of the lev's peg to the euro since 1997. Despite the reduction by the Austrian, Greek, Italian and French banks (1/3 of the market) of their debt to their parent companies, external debt represents about 100% of GDP. Nonetheless, almost half of it is made up of intragroup loans in the context of foreign direct investments.

 

Reforms delayed by political alternation and fragmentation

Following the October 2014 elections, Boiko Borisov, already Prime Minister from 2009 to 2013, heads a centre-right government, backed by his party, Citizens for the European Development of Bulgaria (GERB), the Reformist Bloc, Alternative for Bulgarian Renaissance (although, centre-left), and the Patriotic Front. The coalition has 137 seats out of 240, which should allow him to implement reforms. Reforms to the judicial system and banking supervision should be adopted by the end of 2016. They are intended, respectively, to further the independence of the judiciary from business and political circles, and prevent another banking scandal like that of 2014. They form part of the programme to combat corruption and organised crime. However, the coalition is not a monolith. The last two elections were brought forward following the break-up of the governing coalition. The changeover at each election, the fragmentation of the political landscape and the close relationship between politics and business serve to slow the pace of reform. Unlike the previous and transitory government formed by the Socialist Party and the Turkish minority party, the current government is affirming its European roots. However, cultural (Orthodox Christianity), economic (energy) and financial (through the banks) ties with Russia will remain. 

 

Last update : January 2016

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