Bulgaria Business Forecast Report Q1 2009

Publication Date	October 2008
Publisher	Business Monitor
Product Type	Report
Pages	73
ISBN Number	1744-8816
Product Code	BMI02915

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Summary

Tough Times Ahead

In light of the sustained turmoil in international financial markets and uncertainty surrounding the restructuring of the global banking system, we caution that a rapid severing of external credit lines to Bulgaria could precipitate a sharp unwinding of the countrys economic asymmetries. We have long been cautious of Bulgarias substantial and entrenched macroeconomic imbalances, which include a hefty current account deficit and burdensome level of external debt. With economic growth still strong during H108, the potential for growth to collapse going forward could prove too great a shock for the economy which has grown at an average 6.6% over the course of 2000-2007. Indeed, should growth slope off sharply, economic asymmetries may unwind quickly, setting the economy up for a hard landing - a scenario that we believe now looks more likely should capital inflows dry up (laying bare Bulgarias substantial external exposure) or an emerging Europe-wide banking sector crisis unfold. This in turn would further compound already elevated risk aversion towards Bulgarian assets over the medium term.

Despite efforts to bolster support through a planned splurge on social aid spending, we hold to our view that Bulgarias ruling coalition government will not survive in its present form past the June 2009 parliamentary election. Given that the Bulgarian Socialist Party (BSP) - the main coalition partner - has persistently lagged in the polls, and is likely to come under increasing pressure as the health of the economy deteriorates, we see little chance of the Socialists winning over the electorate in the coming nine months.

Our long-held emerging Europe-wide view that spiralling inflation would turn to disinflation during H208 is playing out nicely. Having eased to 14.4% y-o-y in July from the June peak of 14.7%, headline inflation took a sharp leg down to 11.8% in August. This mirrors similar moves elsewhere in the emerging Europe sphere, with Romania, Albania and Macedonia (to name but a few) seeing around 1 percentage point (pp) shaved off their headline inflation figures in August. We believe that the inflationary tide, which has been gathering momentum since June 2007, has now run its course, with a confluence of fundamental and statistical factors supporting a period of disinflation going forward.

The Bulgarian telecoms regulator, the Communications Regulation Commission (CRC), is intending to auction the countrys fourth GSM licence in early 2009. This follows on from the auction earlier this year when the winner and sole bidder, Liechtensteins TelCo, saw its license annulled after it failed to submit paperwork in time. Several of Bulgarias broadband WiMAX providers had expressed an interest in bidding for the GSM spectrum to provide mobile and additional WiMAX services in the previous auction, but the only bidder was TelCo of Liechtenstein. However, a total of 12 firms bought documents for participation in the previous auction, so the CRC may be confident of more success this time around.

Content

Executive Summary
Tough Times Ahead
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Socialist Coalition Unlikely To Survive 2009 Elections
- We believe that the Bulgarian governments attempts to shore up public support through a planned social aid payment to pensioners and poor households will be insufficient to win over the electorate ahead of the 2009 parliamentary election.
- Foreign Policy
- Suspended EU Funds To Delay Economic Convergence
- The release of two reports by the European Commission outlining the lack of progress made by the Bulgarian government in eradicating corruption supports our view that graft remains one of the biggest threats to Bulgarias long-term economic convergence.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Pressures Building For A Hard Landing
- Despite Bulgarias solid rate of economic expansion during H108, we are still convinced that growth will slow significantly through the remainder of 2008 and that risks of a hard landing will continue to build.
- Inflation
- Inflation Easing, But Contamination Risks Remain
- Though the disinflationary process is gathering momentum in Bulgaria, we hold to our view that a restoration of domestic price stability is still a long way off.
- Banking sector
- Risks Of Banking Sector Crisis Elevated
- While G7 banks have been thrown a lifeline in the form of various high profile rescue packages from national governments, we remain concerned that a sharp contraction in external credit availability could spark a crisis in the Bulgarian banking sector.
- Property Market
- Bulgarian Property: Another Shoe To Drop?
- While we continue to believe in the potential for long-term convergence in Bulgarian asset valuations with those of Western Europe, a bubble could well be about to burst in the shorter term.
Chapter 3: 10-Year Forecast
- The Bulgaria Economy To 2018
- The State Of Bulgaria In 2018
- Having reassessed underlying growth dynamics, we expect the Bulgarian economy to continue powering along at a healthy clip over the next ten years.
Chapter 4: Special Report
- Why The US Can Remain World Superpower
- Wealth Is Shifting East...
- The USs current financial woes will not necessarily undermine its position as a global superpower.
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Automotives
- Executive Summary
- Given the performance seen in H108, BMI forecasts automotive sales growth of 27.1% in 2008.
- Pharmaceuticals
- Executive Summary
- BMI has recently revised its forecasts for the Bulgarian drug market after new figures were released by market research firm IMS Health.
Chapter 7: BMI Global Assumptions
- Global
- United States
- Eurozone
- Japan
- China
- Commodities
Tables
- Table: Bulgaria Political Overview
- Table: Economic Activity
- Table: Foreign Debt
- Table: Bulgaria Long-Term Macroeconomic Forecasts
- Table: Geopolitical Power Index
- Table: Bmi Business And Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Europe, Fdi Annual Inflows
- Table: Bmi Trade Ratings
- Table: Top Export Destinations
- Table: Bulgaria Autos Sector - Historical Data And Forecasts
- Table: Drug Expenditure And Prescription Market Indicators
- Table: Global Assumptions