News
• Paper production, chemical and pharmaceutical industries boast best development prospects
In their latest sector analysis on the development of the Bulgarian economy, UniCredit’s economists forecast favourable development of the tradable sectors which already showed good results in 2010.
Paper and pulp, chemicals, pharmaceuticals, basic metals and fabricated metal products as well as machinery, equipment and appliances are the industries to report highest growth this year.
UniCredit’s analysis shows that Paper manufacturing in 2010 has benefited from the cyclical upturn in demand and favourable pricing levels. UniCredit’s economists think that this sector provides good opportunities for further growth, with untapped potential for leveraging on domestic raw materials. Currently, import still dominates considerably over export, which could be reversed going forward, also due to advantages based on lower cost production in the country.
Chemicals and pharmaceuticals, traditionally being strong export drivers for Bulgaria are also ranked among the sectors with the “best” outlook, according to UniCredit’s analysis. The lower indebtedness levels compared to other sectors are supportive. New planned investments in these sectors are likely to lead to more robust output growth. Still, state- regulated gas prices (gas is a major energy source) remain an obstacle and worsen the sectors’ profile.
Basic metals is also ranked by UniCredit’s economists among the “best” performing sectors. As one of the largest exporters historically, the sector has been resilient during the crisis, due to expansion into new export markets and increased capacity in higher value added production, the report points out. Ferrous metals capacity has decreased due to a shut down of important capacity, caused by financing difficulties and the real estate slump, while non-ferrous metals have performed better and compensated for the ferrous metals declines. Investments in improved efficiency, lower pollution and modern capacity substituting obsolete technologies are likely to improve the profile of the sector further, UniCredit optimistically forecasts.
Among the best performing sectors, agriculture is likely to be supported by favourable demand-supply dynamics going forward. Grain production has been the major growth driver, benefiting from favourable pricing levels due to supply shortages and from considerable EU-funding. On the other hand, the livestock segment has suffered due to lack of financing, and slow development of large modern farming. External financing to farming activity in general is reportedly hard to secure, as traditionally the sector is not very attractive for financial institutions. This may lead to below potential growth in crops despite strong profits in 2010. In addition, EU funding plays a crucial role for farmers, and any delays in distribution of such funds usually lead to lower planting activity. Looking ahead, sector fundamentals remain strong, as a favourable climate and unutilised farm land offer significant potential, in light of stable growth in demand, UniCredit’s analysis sums up.
Infrastructure oriented investments managed by the government and crucially supported by EU funding schemes are also likely to be important growth drivers. Among top priority projects appear to be major cross country roads and highways, as well as underground train networks in the capital. Others such as water and waste management are also likely to benefit, while there are initial signs of health care equipment investments, funded by EU programmes, finally likely to go live. Overall, the EU funding frame in the 2007–2013 period is worth EUR 9.4 bn, with an additional contribution of up to EUR 2.0 bn from the Bulgarian government. However, out of the total amount only a mere 11% has actually been paid on projects at present, the possibilities remaining largely unutilized, UniCredit’s analysts said.
Non-tradable sectors – at the other extreme
Unlike tradable sectors those depending on domestic consumption are likely to lag behind the rest of the economy in line with 2010.
Experts expect, consumer spending to remain soft due to persistently high unemployment, low income growth, and meaningful debt levels thus, influencing trends in sectors such as wholesale and retail trade. Some segments, for example shopping malls might be characterised by some overcapacity, while others, for example, discounters still look relatively underpenetrated. Overall, UniCredit experts think that retail market remains quite fragmented and consolidation is likely to progress further, led by expansion plans of retail chains and penetration of new players (the sector has been one of the most attractive for FDI). On the other hand, reviving international trade is likely to continue to stimulate wholesale trade activity.
Construction and real estate activities, except for the infrastructure projects, are also likely to remain among the “worst” performing sectors. Vast supply in segments including residential, office, retail, and leisure during the past several years has been significantly outpacing demand growth, potentially leading to much lower levels of activity in the medium term. High indebtedness built up in a very short time frame also bodes ill for the sectors, while vacancy rates are meaningful and building up further due to ongoing completion of already started projects.
Among the sectors with a stable outlook, electricity is a traditionally important sector for the government. The sector remains under-liberalised (state-set prices), with no competition among final providers, and state dominance in generation activities. At the same time overdue investment in the power grid remains an issue due to low profitability of companies which operate the network The government intends to remain the most important player in electricity production, confirmed by the considerable amount compared to the GDP of the country project for a nuclear power station that might be resumed (until now without feasibility study and without secured financing). The government also carries out a subsidized program for renewable energy production incentives based on the objectives set in the European Union which probably will lead to further price rise for the end user.
Solid, below potential - 2.8% GDP growth in 2011
As a result of the opposite development of tradable and non-tradable sectors the economy of the country will report a solid but below potential growth of 2.8% from the GDP this year, UniCredit’s economists pointed out. In their opinion the big challenge for the Bulgarian economy remains its structural transformation so that competitive advantages and export potential to be increased against the non-tradable sectors. The latter account for around 90% from the value added growth and two thirds of the investment activity in the pre-crisis period.