ranking 79, World Bank 2014)
||7.23 million (World ranking
100, World Bank 2014)
||Boyko BORISOV (Prime
- EU membership and
good international relations
- Relatively low systemic political
- 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
- 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
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
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
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
Last review: 06/22/2016