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Bulgaria Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 74 Pages


Table of Contents


Executive Summary
Internal Devaluation Exacerbating Recession
Chapter 1: Political Outlook
Domestic Politics
Corruption: Real Reform Still Lacking
We view positively efforts of Bulgaria’s new government to tackle corruption and organised crime, which were the
cornerstone of the ruling GERB party’s pre-election campaign.
table: Bulgaria Political Table
Foreign Policy
Compensation Claim Unlikely To Affect Turkey’s EU Bid
With Bulgaria preparing a claim against Turkey for property lost by refugees in 1913, we caution that bilateral
relations could suffer going forward.
Chapter 2: Economic Outlook
Economic Activity
Internal Devaluation Exacerbating Recession
Bulgaria’s economic downturn accelerated during Q309, with the government’s internal devaluation strategy
exacerbating the deepening recession.
table: ECONOMIC ACTIVITY
Exchange Rate Policy
ERM-2 Accession Planned, Devaluation Still Likely
The apparent eagerness of the Bulgarian government to push forward with ERM-2 accession (and eventual euro
adoption by 2013) have certainly altered the outlook for the lev over the medium term.
table: EXCHANGE RAT E
Fiscal Policy
Fiscal Slippage Indicative Of Political Pressures
With the Bulgarian government now likely to run a full-year fiscal deficit in 2009, having previously asserted that
the books would balance, we caution that this is a sign of growing political pressures as unemployment edges higher.
table: FISCAL POLICY
External Debt
Debtors Vulnerable To Monetary Tightening
The failure to start paying down its external debt burden in 2009 has left Bulgaria’s private sector vulnerable to a
shift towards tighter monetary policy in the eurozone from H210 (compounded by rate hiking in the US from 2011).
table: DEBT INDICAT ORS
Balance Of Payments
Current Account Deficit To Remain In Single Digits
The correction to Bulgaria’s bloated current account deficit continued apace during the first three quarters of 2009,
though the scope of the adjustment has surpassed our expectations, underpinning a revision to our end-2009 forecast.
table: BALANCE OF PAYMENTS (Euro)
Banking Sector
Tough Times Ahead In 2010
With the Bulgarian economy set to remain in recession during 2010, we caution that the impact of rising unemployment
and weak corporate profitability will pose major risks to banking sector stability.
Chapter 3: 10-Year Forecast
The Bulgarian Economy To 2019
Economic Growth Slashed In Half Over Long Term
We believe that the unsustainable credit boom prior to the global financial crisis, which has left the private sector
heavily indebted, will leave an indelible mark on Bulgaria’s longer term economic outlook.
table: BULGARIA Lon g-Term Macroeconomic Forecasts
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succession In 2010-2019
Table: Countries At Risk Of Major Political Upheaval
Table: Countries At Risk Of Interstate Conflict Or Heightened Bilateral Tension
Table: Countries Facing Secess ion ist Or Autonomy Movemen ts, Ins urgenc ies , Or Civil Wars
Table: Pivo tal States
Chapter 5: Business Environment
Business Environment Outlook
Table: BMI BUSINESS AND OPERATI ONAL RISK RATI NGS
Institutions
Table: BMI LEGAL FRAMEWORK RATI NGS
Infrastructure
Market Orientation
Table: Emerging Europe, Annual FDI Inflows
Table: BMI TRADE RATI NGS
TA BLE: TOP EXPORT DESTINATI ONS
Operational Risk
Chapter 6: Key Sectors
Pharmaceuticals
Telecoms
Table: Telecoms Sector - Internet - Historical Data & Forecasts
Chapter 7: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TA BLE: GLOBAL AND REGIONAL REAL GDP GROWTH
TA BLE: developed market exch ange rates
Table: Emerging Market Exch ange Rates
TA BLE: GLOBAL ASSUMPTIONS
TA BLE: DEVELOPED STAT ES
TA BLE: EMERGI NG MARKETS

Abstract

Bulgaria’s economic downturn accelerated during the third quarter of 2009, with the government’sinternal devaluation strategy exacerbating the deepening recession. Though certainly not as severeas some of the more precarious economies in emerging Europe, Bulgaria’s downturn will likelylinger further into 2010 owing to the ruling GERB party’s deflationist strategy, with fairly weak growthexpected in 2011. Furthermore, we caution that the emergence from recession will be marked byelevated unemployment and private sector balance sheet adjustment as households, firms andbanks pay down outstanding debts. With a return to pre-crisis growth levels not on the agendaover the medium term, and with unemployment lagging the recovery, we caution that support forthe government will deteriorate going forward.

S upporting its pre-election pledge to eradicate corruption and organised crime, Bulgaria’s newminority centre-right GERB (Citizens for European Development of Bulgaria) government has embarkedon an unprecedented graft-fighting drive since coming to power. However, we are concernedthat the government is focusing heavily on prosecuting public officials, rather than embarking onmore far-reaching reforms. Indeed, the fight to bring previous government officials to justice risksturning into a clampdown on opposition supporters, with GERB levelling blame at the BSP for themajority of Bulgaria’s political and economic problems. Progress on the broader economic reformfront, meanwhile, has been limited.

Having previously asserted that a balanced budget would be targeted in 2009, Bulgaria’s newcentre-right GERB government has conceded that it will now run a small deficit of BGN500mn,around 0.76% of GDP. We caution that fiscal slippage this year is indicative of ongoing politicalpressures, which are likely to mount further as unemployment edges higher. Indeed, though thegovernment had promised ahead of the July parliamentary election to restore the health of publicfinances, the deterioration in popular support since coming to power (which we previously warnedof) could limit the scope of fiscal tightening going forward.

I n line with the government’s broader anti-crisis strategy, Finance Minister Simeon Djankov hasindicated that Bulgaria will apply to join ERM-2 as early as March 2010, with a view to securingeurozone membership in 2013. While current eurozone members may be less keen to admitBulgaria amid the ongoing economic crisis, we note that the bloc will have little choice given thatthe Maastricht Criteria are likely to be satisfied. Though the government’s euro ambitions couldcertainly alter the outlook for the lev going forward, we nonetheless believe that it is too early totake out our nominal devaluation forecast from our core scenario. Instead, we stress that shouldBulgaria join ERM-2, the government may opt to devalue the currency within accepted limits in abid to help correct the currency misalignment.

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