Bulgaria Business Forecast Report Q3 2008

Publication Date	May 2008
Publisher	Business Monitor
Product Type	Report
Pages	62
ISBN Number	1744-8816
Product Code	BMI02059

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Summary

Endemic Corruption Holding Back Eu Convergence The Bulgarian economy looks to have passed its cyclical peak following a bumper growth outturn of 6. % in 007. Though we believe that the deterioration in both domestic and external demand will slow the pace of economic expansion in 008 and 009, the Bulgarian economy will continue to grow at an enviable clip of .6% and . %, respectively. In the latest edition of the Bulgarian Business Forecast Report we explore the likely implications of a potential US recession and eurozone slowdown on Bulgaria's growth dynamics. In addition, we consider how the deterioration in global credit conditions will affect domestic demand and impact on Bulgaria's economic convergence to the EU. Though real GDP growth will suffer somewhat in 2008-2009 from a confluence of factors, we affirm our view that a growth revival is on the cards in 2010 following a period of consumer debt consolidation and industrial capacity building.

Though the government's attention was diverted away from tackling corruption and towards EU membership in 007, we believe that pressure will start to mount for serious reform. Indeed, the lack of progress in eradicating graft inspired the fifth vote of no confidence in April against the ruling coalition. Though the coalition's substantial parliamentary majority (169 out of 240 seats) made the no confidence vote easy to quash, it cast a shadow over coalition stability, with junior coalition member National Movement for Stability and Progress prompting the resignation of Interior Minister Rumen Petkov (of the ruling Bulgarian Socialist Party).

007 is likely to have been a peak year for external debt growth as Bulgaria passes the top of its economic cycle, and global financial conditions continue to deteriorate, further raising the cost of external borrowing. Though we do not expect a contraction in total gross external debt, we do see the growth rate slowing significantly. Following a revision of our GDP growth forecasts and re-evaluation of Bulgaria's debt dynamics, we expect gross external debt to edge up marginally to 97.4% of GDP in 2008 (from 97.3% in 2007) and likely tip over 100% by 2010. We caution that Bulgaria's relatively high exposure to external debt poses significant risks to macroeconomic stability and to our economic growth forecasts. Moreover, the risks are more pronounced when considering Bulgaria's substantial current account deficit, which we expect to come in at 20.1% of GDP in 008.

Sofia's metro operator, Metropolitan, has announced that it is re-launching the tender for the construction of a new part on the Bulgarian capital's subway. The subway in Sofia currently has only one line and 10 stations in operation, although plans are being implemented to expand it further with the support of EU funding. Candidate status for EU membership led to the unlocking of structural funds for investment in transport. Not only will the proposed development boost activity in the construction industry, which is likely to suffer in 008 and 009, but it will also improve Bulgaria's low quality transport network. However, we caution that a failure of the Bulgarian government to get serious about eradicating corruption and organised crime may stem the flow of EU aid, which in turn may set back future large scale infrastructure projects.

Content

Executive Summary
Endemic Corruption Holding Back EU Convergence
Chapter 1: Political Outlook6
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics8
- Bulgarian graft Corrupting Convergence
- Despite increasing pressure from the EU and deteriorating voter support, we believe that the ruling coalition
- will not make substantial headway in eradicating corruption and organised crime ahead of the next parliamentary
- election scheduled for 2009
- Table: Bulgarian Political Overview10
Chapter 2: Economic Outlook
- SWOT analysis11
- BMI Economic risk ratings
- Economic activity
- growth resurgence in 2010
- We believe that Bulgaria has passed its peak in the economic cycle, and as a consequence economic growth
- will come in under 6% in 2008
- Table: Bulgaria - Economic activity14
- Balance of Payments
- Current account Dynamics To gradually improve
- Following 2007's blowout 21.4% current account deficit, we believe that the shortfall will hover around 20% in
- 2008 and 2009 before starting to narrow through the remainder of our five-year forecast period
- Table: Bulgaria - Balance Of Payments
- Monetary Policy
- Inflation Peak In Q208?
- Following another monthly inflation release in which prices continued to edge upwards, we affirm our end of
- period inflation forecast of 9.5% for 2008
- Table: Bulgaria - Monetary Policy
- External Debt
- The growing Debt Pile
- Though we expect growth in gross external debt to slow considerably in 2008 and 2009 on the back of
- deteriorating global credit conditions and moderating economic growth
- Table: Bulgaria - Foreign Debt
- investment Climate
- Equities To Trade Higher Over The longer Term
- In line with our regional outlook, we affirm our view that Bulgarian equities will continue to look weak over the
- short to medium term
Chapter 3: Special Report
- Business Outlook For global Frontier Markets
- growing Fast On The New Frontier
- The 41 states that BMI examines in a new report on our online service may make up only a small slice of the
- world economy, but they possess characteristics that will see them gain importance in the eyes of investors
- and global businesses over the coming years
- Table: Frontier Markets - Key Data and Projections For Top 10 Countries
- Frontier investment
- Potential and Pitfalls
- The spectacular macroeconomic performance of frontier markets in recent years has been matched by mildly
- successful efforts to deepen capital markets
- Table: gDP Per Capita, uS$ (in Order Of % increase)
- Table: Diversity Through Frontier Markets - Correlation Coefficients January 2004-April 2008
- Table: Frontier Market indices
- regional Overview
- laos
- Neighbouring Economies The Key To growth
- Laos's GDP growth has been boosted in recent years as neighbours China, Thailand and Vietnam compete for its
- natural resources. GDP expansion in 2007 has been estimated at 7.6% and we see annual growth remaining above
- 7% for our five-year forecast period
- Yemen
- Huge Potential, But Don't Bank On gCC Membership
- Markets do not come much more frontier than Yemen, and, as would be expected, there is huge potential for
- development, with the prospect of eventual GCC membership likely to act a key investment pull
- Table: Yemen Economic activity
- Democratic Republic of the Congo
- Mining industry To Drive growth
- The Democratic Republic of the Congo's mining industry will be a key driver of growth and is likely to attract
- significant levels of FDI, with our real GDP forecasts standing at 8.3% and 7.9% in 2008 and 2009,
- respectively
- Table: Democratic republic Of The Congo - Economic activity34
- Cuba
- investment Prospects after Fidel
- The accession of a new leadership structure in Cuba has sparked excitement that the 45-year-old trade embargo
- with the US may be lifted and Cuba may move toward market liberalisation
- Table: Cuba Macroeconomic Data and Forecasts38
- Mongolia
- Minerals To Drive Economic Boom
- Mongolia is in the midst of a massive resource-led economic boom that should lift GDP growth into the double
- digits and underpin robust increases in exports and inflows of foreign investment capital over the long term
- Table: Mongolia - Economic activity
Chapter 4: Business Environment41
- SWOT analysis41
- BMI Business Environment risk ratings42
- Business Environment Outlook
- Table: BMI Business and Operational risk ratings
- institutions
- Table: BMI legal Framework ratings45
- infrastructure
- Market Orientation
- Table: FDi Emerging Europe50
- Table: BMI Trade ratings51
- Table: Top Export Destinations
- Operational risk
Chapter 5: Key Sectors54
- autos
- Table: Bulgaria autos Sector - Historical Data and Forecasts
- Freight Transport
- Table: Freight Carried, Domestic and international