The positive side of the long period of lower potential growth is the fast decrease in the current account deficit;

Bulgarian economy needs a balanced model for growth, based on the net export

A drop of GDP by 6% this year and by 3% in the next one, 2010, expect UniCredit Bulbank’s economists. According to the forecasts of the experts of the biggest bank in the country Bulgarian economy will experience a longer period of economic growth below the potential level compared to the other CEE countries.

“In our view, the worst for the Bulgarian economy is yet to come and the prospects for economic recovery currently seem vague and relatively far in time. Of course, the positive side of all this is related to the fast reduction of the current account deficit down to amounts, which the markets will be ready to tolerate in the period after the end of the global financial crisis”, explained Christophor Pavlov, Chief Economist at UniCredit Bulbank.

He thinks that a winning move in the current situation would be to establish a balanced model for growth of Bulgarian economy, where not only domestic demand will play a role, but also the net export. „This means a change in the economic incentives so that it becomes possible to transfer production resources from sectors focused on domestic demand, which are characterized by reduced potential for further growth, to export-oriented productions. And these to be average and high-technology products manufactures, characterized by average to high added value, low labour intensity and energy consumption”, said Pavlov.

The last months of the decline

The global financial crisis is already strongly affecting Bulgaria, whereas at the moment all indicators (such as those reporting the economic results in the past few months, as well as those permitting to assess the economic activity in the next few months) point to intensification of the recession in the Bulgarian economy, the CEE Quarterly economists of UniCredit Bulbank sum-up in their traditional analysis.

A proof for this is the already presented data showing an average monthly drop by 17.7% of the industrial production on a yearly basis. In the first two months of the second yearly quarter it sharply dropped down by 21.1% average per month. “It is interesting to note that the sectors manufacturing low technology products with low added value (textile manufacture, manufacturing of timber and timber items, paper, cardboard, etc.) report greater decline in the output and sales compared to the industry sectors manufacturing average and high-technology products with average and high added value (such as manufacturing of core metals and core metal products, computers, electronics and optical equipment, etc.)”, Christophor Pavlov points out.

Of course, the smallest decline is observed in the so-called “non-cyclic sectors” – such as production of food and drinks and other goods for everyday consumption – where the interrelation of economic growth and consumption is small. At the other end – suffering the most significant slowdown – are the sectors, which most benefited from the boom in investments and loans, such as construction and real estate.

Dependency on foreign capital

According to UniCredit Bulbank’s analysts, the decline in the foreign capital by around 85% on a yearly basis for the first four months of 2009 will affect Bulgarian economy more than it will affect the rest of Europe’s emerging markets because the local private sector is characterized by the greatest imbalance between domestic investments and savings. So, these countries, which relied the most on an inflow of foreign savings will eventually experience a more difficult process of adapting to the new global economic conditions, says the report on the economic development of the bank.

Individual consumption – between the comfort of the drop in inflation and the impairing labour market

Two clearly emerging trends determine individual consumption– on the one hand, consumers feel relieved by the drop in inflation but at the same time the increased costs for servicing loans and the sudden impairment of the labour market obstruct achieving the expected increase in consumer expenses, which might mitigate the severity of the ongoing economic decline.

“On a yearly basis, retail sales reported a decline in the past seven consecutive months. We do not expect a reversal of this trend in the near future and we project that individual consumption will affect in a negative way the growth of GDP in 2009 as well as in the next year, 2010”, UniCredit’s economists projected.

However, they pointed out that within the context of the fixed rate the deflation forces will intensify. “The index, reporting base inflation, will start dropping faster with the escalation of the economic slowdown in the second half of the year. The deflation forces will be further reinforced by the reduction in the international prices of energy resources, which is then reflected in the domestic prices of electricity and gas with a significant delay in time due to the specifics of the agreement between Bulgargas and Gasprom. Along with that, there will be a certain inflation pressure related to the administratively regulated prices at the beginning of next year when the process of reconciliation of the excise duties is expected to receive a final push”, UniCredit's report explains.

The restricted scope for maneuvering, related to loosening the fiscal policy, which was witnessed at the beginning of the year was almost entirely exhausted in the last few months. It is interesting to note that Bulgaria is one of the CEE countries, which during the last year have loosened their fiscal policy to the greatest degree. For the first 5 months of 2009, the surplus in public finance equaled an amount less than 1% from the expected GDP for 2009, whereas during the same period last year the surplus in public finance amounted to 5% of the GDP. That is to say that the fiscal expansion, which we witnessed in the past 12 months corresponds to an amount equaling 4% of the GDP. From here onwards if by presumption we have a deficit in public finance equaling 1% of the GDP at the end of July, the chances for further loosening of the fiscal policy – without affecting the macro-economic stability in a negative way – are slim. Currently, an unfavorable combination is observed of aggravating decline in incomes and more than a two-digit increase in the public expenses growth rate, which calls for revision of UniCredit’s projection regarding the GDP growth.

 

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Additional media information:

UniCredit Bulbank, Public Relations and Corporate Communications

Victoria Blajeva, tel +359 (0) 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch

Ekaterina Ancheva, tel +359 894 518 193 , flbufsjob/bodifwbAvojdsfejuhspvq/ch