Country Report Bulgaria October 2008

Outlook for 2009-10

• Relations between the Bulgarian Socialist Party (BSP) and its partner in the ruling coalition, the centrist National Movement for Stability and Progress (NMSP), are likely to stay problematic until the next election, due in mid-2009.
• Citizens for European Development of Bulgaria (CEDB), currently in opposition, looks set to lead the government that emerges from the next election, although this is unlikely to lead to any significant shifts in economic policy.
• The EU will keep Bulgaria under close scrutiny, continuing to demand judicial reforms and more tangible results in the fight against corruption and organised crime.
• Growth in real GDP will slow to around 4% a year in 2009-10 from the rapid pace seen in 2006-08. The risk that the slowdown will be sharper than this is increasing.
• Headline inflation will fall sharply in late 2008 and early 2009. The fall in underlying inflation will be more gradual, but weaker growth will restrain domestic price pressures. Inflation is expected to average around 5% in 2010.
• The current-account deficit will only begin to narrow once the growth of domestic demand slows significantly, and will still be around 16% of GDP in 2010.

Monthly review

• Despite the unpopularity of the governing parties, and especially the NMSP, the opposition's attempts to force an election by collecting 1m signatures look unlikely to succeed.
• The budget surplus continues to rise, and by the end of July the accumulated surplus was above the planned target for the full year. The government has drawn up a supplementary budget to spend some of the excess surplus.
• The government has announced that it is going ahead with plans to create Bulgaria Energy Holding (BEH), grouping together all the state-owned firms in the energy sector around the existing Bulgargaz holding company.
• Revised figures show GDP growth of 7.1% year on year in the second quarter of 2008, significantly stronger than suggested by the initial flash estimate. Domestic demand continues to be the main driver of growth.
• Falling food prices helped the headline inflation rate to fall to 11.2% in August.
• The rapid growth of imports continues to widen the current-account deficit. With much of the deficit being financed by foreign borrowing, external debt is rising rapidly, and was equivalent to almost 100% of 2008 GDP in July.