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Growth moderates amid weak investment

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General Information

GDP USD55.7n (World ranking 79, World Bank 2014)
Population 7.23 million (World ranking 100, World Bank 2014)
Form of state Parliamentary Democracy
Head of government Boyko BORISOV (Prime Minister)
Next elections 2016, presidential

Country Rating B2note-circle-med-risk


  • EU membership and good international relations 
  • Relatively low systemic political risk 
  • Currency board has withstood global turbulences since 2008 and BGN is currently not overvalued
  • History of prudent fiscal policies 
  • Current account close to balance since 2010
  • Generally adequate business environment


  • Very slow progress on EU-required judicial reform and anti-corruption measures 
  • Public discontent about living standards
  • Continued tight credit markets 
  • Deflationary pressures since August 2013 
  • High external debt burden
  • Banking sector vulnerability to financial contagion from the Eurozone debt/banking crisis; concern about banking supervision due to deposit runs on two domestic banks in 2014 


Economic Overview

Growth to ease slightly in 2016-2017

Real GDP growth continued to accelerate to +3% in 2015 from +1.6% in 2014. The breakdown of GDP reveals a return to largely export-led growth from domestic demand-driven expansion in 2014. Private consumption increased by just +0.8% in 2015 (+2.7% in 2014), public consumption by +0.3% (+0.1% in 2014) and fixed investment by +2.5% (+3.4% in 2014), while inventories subtracted about -0.3pps from 2015 growth (+0.2pps in 2014). Net exports made a positive contribution of +2.2pps to 2015 growth (-1.1pps in 2014) thanks to strong export expansion of +7.6% (-0.1% in 2014) while imports picked up more moderately to +4.4% (+1.5% in 2014).
In Q1 2016, real GDP grew by +2.9% y/y according to a preliminary estimate. Final consumption increased by +2.4% y/y but fixed investment contracted by -3.9% y/y. External trade activity lost steam as well, with exports declining by -0.3% y/y and imports even more by -2.8% y/y, so that net trade still made a positive contribution to Q1 growth. Euler Hermes expects somewhat less economic momentum in 2016 as a whole and forecasts full-year growth of +2.6%, followed by +2.7% in 2017.


Banking sector turmoil in 2014, but systemic crisis unlikely

In June 2014, deposit runs on two large domestic-owned banks caused concerns about financial stabil¬ity, but swift action by the Bulgarian National Bank (BNB; central bank) helped contain the pres-sures and sustain confidence in the overall banking system. Corporate Commercial Bank (CCB; then 4th largest lender) was taken over by the BNB and First Investment Bank (FIB; 3rd largest lender) managed to restore confidence quickly with immediate BNB support. The immediate market response was calm: The government raised EUR1.5bn in a Eurobond with a yield at just 3.1% shortly after the "mini crisis". Overall, the banking sector has remained liquid and well-capitalised, and the non-performing loans (NPL) ratio, though still quite high (14.4% in March 2016), is declin¬ing. However, note that the NPL ratio of non-financial corporations stood at 23.4% in March 2016. Bulgaria's financial system had also weathered the impact of the 2008-2009 global financial crisis relatively well and has also been largely unaffected by the swings in capital flows to emerging markets since mid-2013. Nonetheless, some con¬cerns remain owing to banks' heavy reliance on funding from EU parent banks – whose subsidiaries dominate the sector (25% Greece, 15% Italy, 12% Hungary) – which still makes them vulnerable to finan¬cial contagion from the Euro¬zone debt/banking crisis. Moreover, deleveraging by Eurozone banks continues to retard credit growth. 


Currency board limits scope of monetary policy to tackle deflation

Bulgaria's currency board (BGN1.95583:EUR1) has withstood the pressures from the 2008-2009 global financial crises well and does not appear to be at risk in the short term as the real effective overvaluation of the BGN, which exceeded 15% from early 2008 to mid-2009, has given way to stabilisa¬tion, indicating that Bulgaria has regained relative com¬pet¬itiveness. Moreover, foreign exchange (FX) reserves continue to cover the monetary base (a requirement for a currency board) clearly. However, the currency board largely neutralizes monetary policy.
Headline consumer price inflation entered deflationary territory in August 2013 amid a protracted low growth environment and reached a low of -2.6% y/y in February 2014. Although the economy has recovered since, deflationary pressures have persisted and even intensified again in early 2016 (-2.2% y/y in April 2016) mainly owing to lower oil/energy costs and falling food prices. Euler Hermes expects deflationary pressures to continue for some time before positive inflation may perhaps return by the end of 2016.


Public finances remain adequate 

Bulgaria has had a long-lasting commitment to fiscal prudence, reflected in many years of fiscal surpluses or acceptable deficits. Public debt declined rapidly from 71% of GDP in 2000 to just 13% in 2008 before gradually rising to 17% in 2013.

In 2014, the banking sector turbulences have had a fiscal cost, for example the government lent BGN2 bn to the State Deposit Guarantee Fund. The fiscal deficit rose to -5.4% of GDP and public debt to 27% of GDP. In 2015, the fiscal deficit narrowed again to -2.1% of GDP and public debt stabilised. As growth moderates, Euler Hermes forecasts the annual fiscal deficit to edge up slightly to about -2.5% of GDP in 2016-2017 while public debt should remain below 30% of GDP, which is still very low by EU standards.


External debt declines but is still high

The current account has been close to balance since 2010 and should remain so in 2016-2017. Foreign direct investment inflows have remained robust and amounted to 3.6% of GDP in 2015. 
However, the legacy of large current account deficits from 2003-2009 has left Bulgaria with a very high external debt burden. Even though gross external debt declined by –EUR5bn in 2015 to EUR34bn at year-end, it still accounted for a worrisome 77% of GDP. The private sector share of external debt was 82%, while total short-term debt as a share of gross debt has fallen to 23% from the 36% peak in late 2008. The external debt service ratio rose to 28% in 2015 and should remain close to 30% in 2016.


FX reserves have markedly increased 

FX reserves have increased substantially since end-2013 and stood at EUR20.2bn in April 2016, a comfortable level with regard to import cover (more than seven months). Moreover, in other terms reserves now cover about 120% of the estimated external debt pay¬ments falling due in the next 12 months, an adequate ratio and an improvement from 80% two years ago. 



Last review: 06/22/2016