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Bulgaria Business Forecast Report Q4 2008

Published by: Business Monitor International

Published: Jul. 28, 2008 - 59 Pages


Table of Contents


Executive Summary
Risks To Economic Stability Elevated In 2008 And 2009
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Endemic Graft To Spur Further Withdrawal Of EU Funds
The Bulgarian government has stepped up efforts to tackle deep-rooted corruption, in an attempt to improve
deteriorating relations with the EU ahead of the European Commission’s progress report on corruption in Bulgaria
due to be released on July 23.
TABLE: BULGARIA POLITICAL OVERVIEW
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Strong Outturn In Q108, But Slower Growth On The Horizon
Though the Bulgarian economy continued to fire on all cylinders in Q108, we caution that growth will slow towards
the end of the year as both domestic demand cools and the external environment deteriorates.
TABLE: ECONOMIC ACTIVITY
Monetary Policy
Spiralling Inflation Exacerbates Economic Asymmetries
With headline inflation continuing to spike higher in May, and with little in the way of policy response from the
incumbent government, we believe that the risks to macroeconomic stability are growing.
Exchange Rate Policy
Lev Likely To Remain Pegged
TABLE: EXCHANGE RATE POLICY
External Debt
Swelling Debt Burden Compounds Macroeconomic Risks
Though we have previously been more optimistic about Bulgaria’s ability to manage its substantial external debt
burden, the acceleration in debt accumulation (particularly short-term bank borrowing) during the first four months
of 2008 is starting to provide cause for concern.
TABLE: FOREIGN DEBT
Investment Climate
Opportunities For The Strategic Investor Remain
Foreign direct investment flows to Bulgaria have been less impressive over the first four months of 2008,
potentially confirming our view that there will be a deterioration in investment activity over the course of 2008
and 2009.
Chapter 3: 10-Year Forecast
The Bulgarian Economy To 2017
Long-Term Outlook
Having reassessed underlying growth dynamics, we expect the Bulgarian economy to continue powering along at
a healthy clip over the next 10 years.
TABLE: BULGARIA LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
Mega-Urban Regions
Investment Opportunities And Risks
TABLE: THE WORLD’S 30 LARGEST URBAN AGGLOMERATIONS
TABLE: THE WORLD’S RICHEST CITIES IN 2020 BY GDP
TABLE: THE WORLD’S FASTEST GROWING URBAN AREAS BY POPULATION
Chapter 5: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
Institutions
TABLE: BMI LEGAL FRAMEWORK RATINGS
Infrastructure
Market Orientation
TABLE: FDI EMERGING EUROPE
TABLE: BMI TRADE RATINGS
TABLE: TOP EXPORT DESTINATIONS
Operational Risk
Chapter 6: Key Sectors
Food & Drink
TABLE: BULGARIA MASS GROCERY RETAIL SALES BY FORMAT (US$BN)
Telecommunications
TABLE: BULGARIAN TELECOMS SECTOR - FIXED-LINE HISTORICAL DATA & FORECASTS
TABLE: BULGARIAN TELECOMS SECTOR - MOBILE HISTORICAL DATA & FORECASTS

Abstract

Risks To Economic Stability Elevated in 2008 and 2009

While headline growth figures continue to impress in the first quarter, we caution that the economywill start to cool during the second half of the year as both domestic and external factors conspireto retard growth. On the domestic front, the higher cost of borrowing and burgeoning levels ofdebt will stimulate a move from spending to saving and debt consolidation for both consumersand firms. The external environment will prove no less favourable, with the likely US recession andeurozone slowdown weighing on external demand for Bulgarian exports and potentially impactingforeign investment flows. As a result of this double whammy we expect growth to dip below 6.0%in 2008 for the first time in four years. Indeed, we forecast real GDP growth slowing to 5.6% thisyear, following 2007’s 6.2% outturn. Furthermore, given that we expect the global credit crunchto intensify and domestic demand to remain subdued over the medium term, we expect growth tomoderate further in 2009 to 5.2%.

The fight against corruption in Bulgaria has seen a resurgence of late, though we believe that thislikely reflects the incumbent government’s attempts to improve relations with the EU and buoydwindling voter support ahead of the European Commission’s progress report due to be releasedon July 23. Bulgaria has been subject to special monitoring since joining the EU on January 1 2007,as it had not satisfied requirements covering the judiciary and payment systems upon accession.Though both Romania and Bulgaria (which joined the EU at the same time) are the subject of theEuropean Commission’s upcoming progress report, we believe that Bulgaria is likely to receivethe more damning criticism.

Bulgaria’s stock of gross external debt jumped 42.8% y-o-y in April, totalling EUR30.7bn, compoundingexisting macroeconomic imbalances. This has been driven by the increasingly leveragedposition of the private sector, which accounts for 91.2% of the total debt burden. Previously, we wererelatively more sanguine about Bulgaria’s ability to manage its external debt liabilities, expecting asustained yet slower rate of accumulation over our five-year forecast period. However, given therapid acceleration in banking sector debt so far in 2008, we now strike a much more cautious toneand highlight the increasing risks to economic stability.

Foreign direct investment flows to Bulgaria were less inspiring during the first four months of 2008,amounting to EUR1.23bn, down from EUR1.44bn and EUR1.73bn for the same period in 2007and 2006, respectively. Recent developments include the decision by Switzerland’s ABB Groupto invest a further US$20mn for the production of its third Bulgarian factory for the manufacture ofautomation and power products. Production is forecast to commence in March 2009 and will resultin an additional 500 jobs. In addition, Germany’s Lufthansa Technik plans to install an aircraftbase maintenance facility at Sofia airport, in an investment worth EUR18mn. The company willalso invest EUR5mn in training 260 aircraft mechanics.

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