Bulgaria Business Forecast Report Q1 2010 : Market Research Report

Bulgaria Business Forecast Report Q1 2010

Published by: Business Monitor International

Published: Oct. 30, 2009 - 64 Pages

Executive Summary: New Government Well Placed To Tackle Downturn
Chapter 1: Political Outlook: SWOT Analysis; BMI Political Risk Ratings; Domestic Politics; Struggle To Restore EU Relations Begins; We view the election of Bulgaria’s GERB-led government positively and believe that the highly skilled cabinet with strong; private sector experience is in a favorable position to steer the economy through the downturn.
Table: Political Overview
Chapter 2: Economic Outlook: SWOT Analysis; BMI Economic Risk Ratings; Economic Activity; Q209 Headline GDP Understates Domestic Hardship; The latest Bulgarian economic growth data for Q209 is certainly bad, but not as dire as we were expecting, with the lower; drag from net exports being a key factor preventing a more precipitous decline in the headline GDP print.
Table: ECONOMIC ACTIVITY: Industrial Production; IP: Lost Output Will Take Years To Recover; The latest industrial production data continue to show a sharp decline in output, suggesting that the economic recovery; is yet to gather momentum.; Balance Of Payments; Growing Demand On BNB Reserves; The sharp adjustment to Bulgaria’s balance of payments position this year saw the country in July post its first current; account surplus since August 2005.
table: BALANCE OF PAYMENTS (Eur): External Debt; Borrowing Binge Could Be Heading For Disaster; Bulgaria’s bloated external debt pile continues to swell, raising concerns that the borrowing binge could come to an; abrupt end, with default rates rising and financial stability impaired over the medium term.
Table: DEBT INDICATORS: Monetary Policy; Inflation Giving Way To Deflation; With consumer prices in Bulgaria still committed to a disinflationary trend, we affirm our view that the government’s; internal devaluation strategy will be successful in ushering in economy-wide asset price deflation.; Fiscal Policy; Public Finances Safer, But Crisis Risks Remain; As a result of the run-up in government spending ahead of the July parliamentary elections, in addition to the growing; demand on social expenditure, Bulgaria’s fiscal position has continued to deteriorate.
Table: FISCAL POLICY: Banking Sector; Strong Capitalisation Boosting Sector Stability; Bulgaria’s banking sector remains vulnerable to constrictions in global credit conditions as a result of its substantial; external debt load and reliance on short-term financing.; Regional; Upside Risks To CEE 2010 Growth Forecasts; Given the firm resolve of governments across the world to re-inflate demand, we caution that upside risks to our 2010; Central and Eastern Europe (CEE) growth forecasts are building.
Chapter 3: 10-Year Forecast: The Bulgarian Economy To 2019; The State Of Bulgaria In 2019; The recession which we forecast for the Bulgarian economy in 2009 and 2010 will have a significant impact on longer; term economic development and convergence .
Table: BULGARIA Lon g-Term Macroeconomic Forecasts
Chapter 4: Special Report: The World’s Fiscal Conundrum; Bleeding Red Ink Across The Globe
Table: WORLD GOVERNMENT EXPENDITURE INDICATORS
Table: WORLD GOVERNMENT REVENUE INDICATORS
Table: WORLD FISCAL BALANCE INDICATORS
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: Emerging Europe, Annual FDI Inflows
Table: BMI TRADE RATINGS
Table: top export dest inations: Operational Risk
Chapter 6: Key Sectors: Autos
table: Bulgaria Autos Sector — Histo rical Data And Forecasts: Food & Drink
table: Bulgaria Grocery Retail Sales By Format (%)
Chapter 7: BMI Global Assumptions: Global Assumptions
TABLE: GLOBAL ASSUMPTIONS
TABLE: GLOBAL & REGIONAL REAL GDP GROWTH
Table: COMMODITY PRICES

Abstract

While it is likely that economic conditions in Bulgaria will stabilize during H209, we hold to the viewthat the economy will not enjoy a strong rebound in growth as experienced immediately after thedeep 1996-1997 recession. While inventory re-stocking may lend some support to the businesscycle, this will be a one or two quarter dynamic at best. Instead, we believe that the necessaryadjustment to the private sector’s balance sheet will pose a substantial impediment to growth overthe medium term. The consumer, in particular, will be unable to drive a swift recovery given thatunemployment is likely to continue heading higher even after the business cycle reaches its nadir.

In addition the rise in unemployment will see demand on social spending escalate, posing a difficultchallenge for Bulgaria’s new GERB-led government, which must tighten up the fiscal finances inorder to maintain investor confidence and prevent a fiscal crisis.

T he Bulgarian parliament approved new Prime Minister Boyko Borisov and his GERB-dominatedcabinet on July 27, with 162 MPs voting in favour and 77 against. Though we view positively theformation of a new reformist government with strong popular backing, we stop short of projectingsmooth and expeditious reform. Indeed, the road to convergence will remain a bumpy one,with risks to political stability still lurking. In particular, despite failing to win an absolute majorityin parliament, GERB has decided not to form a formal coalition with any of the rightist parties,instead choosing to rely on the tacit support of several smaller parliamentary parties. We caution,that while GERB currently benefits from support among the rightist minority parties, this is by nomeans guaranteed over the medium term, and as such will pose an underlying risk to both politicalstability and reform.

S ince we last wrote on the structural adjustment to Bulgaria’s balance of payments the currentaccount flipped into a EUR102mn surplus in July. This is the first time that the current accounthas posted a positive outturn since August 2005 and further supports our view that the balance ofpayments position is adjusting towards a more sustainable long-term equilibrium. On the back ofJanuary-July data the current account deficit has already reached 51% of our end-year target ofEUR3.86bn, suggesting that our projection remains broadly on track. We forecast the current accountdeficit to reach 11.3% of GDP in 2009, more than halving from the bumper 25.2% recordedthe previous year. Beyond this year we expect the current account deficit to decline further towards0.4% of GDP by 2013 and flipping into a 0.8% surplus in 2014.

T he Bulgarian government’s reluctance to devalue the lev against the euro, and the implicit internaldevaluation strategy which accompanies this policy, has seen consumer price inflation fall sharplysince the mid-2008 peak. The collapse of the real estate bubble, previously fuelled by foreign investors(particularly second home owners from Western Europe), has squeezed household incomeand exerted further pressure on asset prices through the wider economy. Indeed, house pricesfell 9.7% q-o-q in Q209 from -12.4% the previous quarter. In a similar vein, despite the recent andbuilding interest in Bulgarian equities on the back of the improvement in global risk appetite, stockprices remain far off their highs, with the SOFIX index still 75% off its 2007 peak. As such, we stillhold to the view that inflation will eventually run into deflation.

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Bulgaria Business Forecast Report Q1 2010

Table of Contents

Abstract