Bulgaria Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	74
ISBN Number	not applicable
Product Code	BMI03433

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Summary

Growth To Collapse In 2009 Despite a significant upward revision by the National Statistical Institute's third quarter GDP figures, we hold to our view that growth dynamics will continue to unwind going forward. As a result of dwindling external credit lines, shrinking export markets, widespread deleveraging and the gradual consolidation of corporate and household balance sheets, economic growth will continue to slow for the remainder of 2009, with a 1.1% outturn pencilled in for this year. The deterioration in economic growth, rising unemployment and falling real wealth will also risk elevating social tensions, which have continued to simmer under the leadership of the Bulgarian Socialist Party-led coalition government.

Indeed, we believe that deterioration in economic conditions will exacerbate the discontent felt towards the ruling government which has failed to eradicate corruption and push forward with tangible reforms in a bid to raise living standards. As such, we caution that 2009 will be a year of elevated political and economic risk, with fears of the economy slipping into recession, lurking in the background.

The latest opinion poll data for December supports our long-held view that Bulgaria's existing coalition government will not survive the next parliamentary election, with the main opposition party, Citizens for European Development of Bulgaria (GERB), set to lead the next coalition government.

Given that deteriorating economic conditions, at the forefront of public concern, are only set to worsen in 2009, we believe that support for the BSP will continue to tumble, providing room for GERB to further consolidate its position as the most popular party. We note, however, that support for both parties has been in decline in recent months as the continued exchange of criticism between GERB and the BSP is being construed as a potentially damaging power struggle, at a time when attention should be focused on shoring up protection for the ailing economy.

Bulgaria's National Statistical Institute has revised down its November industrial production data, with the contraction in output proving more severe than originally thought. Having previously estimated growth of -1.9% year-on-year (y-o-y), newly released data reveal a contraction of 8.8%

- the largest single decline since the beginning of the NSI's data series. Moreover, on a month-onmonth basis, production shrank by 5.0%, while previous data reported a modest increase of 0.3% in November. This provides further indication that the economic downturn in Bulgaria is underway and set to deepen further.

The pace of disinflation in Bulgaria shows few signs of slowing going into 2009, with the latest release from the National Statistical Institute showing inflation taking yet another sharp leg down in December. Consumer price inflation dipped to 7.2% y-o-y from 8.8% in November and marking the sixth consecutive month of slowing inflation. While this bodes well for our core disinflationary view which we hold for 2009 (with inflation forecast to reach 2.3% by end-year), we caution that should economic growth collapse beyond our below consensus 1.1% forecast, and even into recession, disinflation may give way to outright deflation.

Content

Executive Summary
- Growth To Collapse In 2009
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Tough Times Ahead Tackling The Downturn
- With just a few months to go until Bulgarias next parliamentary election, the Bulgarian Socialist Party-led
- coalition government has little chance of surviving in its current form
- TABLE: POLITICAL OVERVIEW
- Domestic Politics
- Riots Indicative Of Further Social Tension Ahead
- The outbreak of rioting in Bulgarias capital, Sofia, on January 14 (the worst since 1997) is a sign of the deep
- rooted dissatisfaction at the governments perceived inability to raise living standards and eradicate corruption
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- 2009 Economic Outlook Still Negative
- Despite a considerable upward revision by the Bulgarian National Statistical Institute to third quarter GDP, we
- hold to our view that economic growth will slow markedly in 2009
- TABLE: ECONOMIC ACTIVITY
- Economic Activity
- Industrial Production To Contract In 2009
- While the run up in global commodity prices and real wages weighed on the profit margins of Bulgarian producers
- in 2008, the destruction of global demand in 2009 mean that industrial output is set to suffer further
- Balance of Payments
- Devaluation Threat To C/A Dynamics
- Bulgarias burgeoning current account deficit is providing ever more cause for concern, with financing for the
- shortfall coming under increasing pressure from the sustained elevation in risk aversion and still tight global
- credit conditions
- TABLE: BALANCE OF PAYMENTS (EURO)
- External Debt
- Lack Of External Financing To Fuel Deleveraging In 2009
- Given the continued swelling of Bulgarias gross external debt pile and increasingly severe servicing requirement
- for 2009, we caution that the economy remains poised to endure a hard landing
- TABLE: FOREIGN DEBT
- Monetary Policy
- Potential Devaluation Could Ward Off Deflation
- With consumer price inflation in Bulgaria slowing sharply in December, we affirm our view that 2009 will see a
- continuation of the disinflationary theme which started to play out in July
- TABLE: MONETARY POLICY
Chapter 3: 10-Year Forecast
- The Bulgarian 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 10 years
- TABLE: LONG -TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will
- combine to spell trouble for the financial services sector in 2009
- TABLE: Banks Leverage Ratios
- TABLE: Assets As % of Home Country GDP
- TABLE: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- TABLE: Exposure As % of Tot al Exposure To Region
- TABLE: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
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: EUROPE, FDI ANNUAL INFLOWS
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: Key Sectors
- Oil & Gas
Executive Summary
- Between 2007 and 2018 we are forecasting an increase in Bulgarian oil consumption of 29.9%, with import
- volumes rising steadily from 119,000b/d to 155,000b/d by the end of the forecast period
- TABLE: BULGARIA OIL & GA S - HISTORIC DATA & FORECASTS
- Infrastructure
- According to our forecasts, growth in the construction sector will be 12.5%, although the actual value of the
- industry will be among the lowest in the region at US$3.4bn
- TABLE: BULGARIA ECONOMIC AND CONSTRU CTION DATA
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL AND REGIONAL REAL GDP GROWTH, % chg y-o-y
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- TABLE: EMERGING MARKET EXCHANGE RATES