Bulgaria Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	70
ISBN Number	1744-8816
Product Code	BMI03896

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Summary

Balance Of Payments Crisis Likely Without IMF Bailout

Though the Bulgarian economy managed to stave off a sharp decline in economic growth during the final quarter of 2008 (posting a 3.5% year-on-year outturn), we hold to our view that a full-year recession is likely to transpire in 2009. This will result largely from a collapse in domestic demand (though this may not materialise until H2, given that Bulgaria continues to lag the eurozone) as credit conditions remain tight and households are forced to account for their excessive borrowing in previous years. In particular, we forecast an economic contraction of 3.1% this year followed up by a decline of 1.5% in 2010, as demand remains weighed down by the lack of external credit availability, and as the deleveraging process continues to gain ground. Moreover, we caution that until an IMF bailout package is confirmed, a balance of payments crisis and a more precipitous decline in economic growth than we currently forecast is still a distinct possibility. We note, however, than given the recent substantial addition to the IMF's financial arsenal, the prospects of Bulgaria obtaining a financial support package look increasingly bright.

The continued and growing lack of confidence in the government's ability to fulfil its policy agenda (let alone forge a comprehensive action plan for the looming downturn) saw the government endure its seventh vote of no confidence on February 26. Given the strong unity among coalition partners, which together preside over a strong parliamentary majority (169 out of 240 seats), the vote was successfully quashed with 85 parliamentarians voting in favour and 148 against. We caution, however, that despite fending off the no confidence vote, the lack of cross-party policy agreement (which prompted the vote) does not bode well for economic and political stability as the downturn starts to gather traction. Indeed, given the precarious state of the Bulgarian economy, what is needed is greater policy co-ordination and support among parties in order to maintain political stability, and prevent what would be a potentially calamitous disruption to the passage of new legislation and financial support packages.

Though we expected the deleveraging process to have gained significant traction by now, it has become ever clearer that Bulgaria is running around six to nine months behind the eurozone. As such, while it is possible that the external debt load will continue to unwind slowly in the coming months, we believe that the deleveraging process will pick up considerable momentum by H209.

With consumer and investment spending set to collapse as asset prices and real incomes fall, alongside a surge in unemployment and acute shortage of new credit, the private sector will be forced to account for its excessive borrowing in previous years.

With inflationary pressures in Bulgaria continuing to dissipate, and with the government remaining firm in its resolve to keep the lev's peg to the euro, the risks of deflation in 2009 continue to mount.

As such,we believe that the monetary authorities have a clear choice: deflation or devaluation.

Given that the fixed exchange rate has been a bastion of stability in previous years, and given the considerable euro exposure of indebted households, the BNB will stave off a devaluation for as long as possible which, in turn, will likely usher in a period of deflation.

Content

Executive Summary
- Balance Of Payments Crisis Likely Without IMF Bailout
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Political Risks Mounting, But Early Elections Unlikely
- With the Bulgarian economy set for a hard landing this year, and with risks of a balance of payments or banking sector
- crisis still lurking, the threats to political stability will continue to build.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Leading Indicators Reflect Deteriorating Conditions
- The Bulgarian economy is in for a rough ride this year as the private sector starts to account for its excessive borrowing
- and consumption in previous years, with consumer and investment spending necessarily set to both take a severe hit.
- Balance Of Payments
- Balance Of Payments Crisis Still Lurking
- Bulgaria's balance of payments dynamics continue to provide cause for concern, with an outright crisis looking ever
- more likely absent a hefty IMF (and/or EU) financial bailout package.
- Monetary Policy
- Staving Off Devaluation Will Fuel Deflation
- With the pace of disinflation showing few signs of easing, and with inventories building up and capacity utilisation
- tumbling, we caution that deflation in 2009 is looking ever more possible.
- External Debt
- Private Sector Key To Deflating The Debt Burden
- Though the deleveraging process has yet to fully get off the ground in Bulgaria, we expect to see momentum build
- during H209 as domestic demand collapses and the private sector is forced to account for excessive borrowing in
- previous years.
- Regional Outlook
- Regional Forecast
- Beyond 2010: The Aftermath Of A Crisis
- In the aftermath of the CEE financial and economic crisis, we see trend growth settling at a lower rate over the long term,
- weighed by the marked slowdown in credit expansion, continued deleveraging, and a need to correct the region's
- substantial external asymmetries.
Chapter 3: 10-Year Forecast
- The Bulgarian Economy To 2018
- The State Of Bulgaria In 2018
- 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.
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Tourism
- Executive Summary
- We believe that Bulgaria's tourism sector will continue to show steady, if not spectacular growth over our forecast
- period to 2013.
- Defence & Security
- Executive Summary
- BMI expects Sofia to move forward with its ongoing reconfiguration of the Bulgarian armed forces in order to
- make them better suited to operating alongside NATO allies in counterterrorism and peace-keeping roles.
Chapter 7: BMI Global Assumptions
- Global Outlook
List of Tables
- Table: Bulgaria Political Overview
- Table: ECONOMIC ACTIVITY
- Table: BALANCE OF PAYMENTS (Euro)
- Table: FOREIGN DEBT
- Table: Lon g-Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- 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's Tourism Industry - Historical Data And Forecasts
- Table: Bulgaria's Defence Sector, 2004-2012 ('000 personnel, unless otherwise stated)
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGI NG MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH