Bulgaria Country Report - January, 2014

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Bulgaria Country Report - January, 2014

According to reports from the EBRD and ILO released in January, the growth rate of Bulgaria's economy will accelerate to 1.8% in 2014 (up from estimated growth of 0.7% last year). However, unemployment will climb to 13.5% (up from 13.1% in 2013). The dynamics of the two estimates suggest that the long-expected recovery of Bulgaria's economy will be a jobless one.

The ILO expects the jobless rate to reach a ten-year high of 13.8% in 2015, after which it will begin to decline. Joblessness will fall to 12.7% in 2016 and further to 11.7% in 2017 and 11% in 2018. The organization also said that Bulgaria will have 2.8% labor productivity growth in 2014 (up from last year's 2%), accelerating to 3.6% in 2015. However, it will decline in 2016 and increase again in the following two years.

The unemployment dynamics the ILO predicts suggest that the expected growth in labor productivity in 2014 and 2015 will result from a decrease in workers' hours spent on production rather than from stronger fundamentals (a restructuring of the economy to a sustainable growth pattern and/or capital accumulation).

Key Points:

• Though the EBRD predicts higher external demand and slight improvement in domestic consumption to boost production, the ILO's employment outlook suggests that firms' eagerness to hire will not increase simultaneously.

• The political landscape continues to shift, with the center-right CEDB retaking the lead and ruling left-wing BSP dropping to second place according to a recent poll. This continues the trend of political uncertainty observed since last February.

• The EBRD projects that the average CPI inflation in Bulgaria will speed up to 1.4% in 2014 from an estimated 0.5% in 2013, when it was subdued by a series of cuts in utility prices. Cheaper food products also contributed to the lower inflation.

• The slow growth in the overall price level has raised concerns among analysts that domestic demand will remain a drag on the economy in the last quarter of 2013 and in early 2014.

Table of Contents

Executive Summary

1. Macroeconomic Overview
1.1 IMF says Bulgaria's economy to recover slowly, needs structural reforms
1.2 Bulgaria ranks 61 in Heritage Foundation's 2014 Economic Freedom Index
1.3 Fitch affirms Bulgaria's rating at 'BBB-' with stable outlook

2. Real Sector
2.1 GDP
2.1.1 Bulgaria's current EU funds absorption rate at 63% - deputy PM
2.1.1 World Bank keeps Bulgaria's 2014 GDP growth forecast at 1.7%
2.1.3 Euro area recovery to help boost Bulgaria's growth, deputy c-bank governor says

2.2 Inflation
2.2.1 CPI falls 1.6% y/y in December 2013, down for fifth consecutive month
2.2.2 Domestic market PPI falls 2.9% y/y in December, averages -1.3% in 2013
2.2.3 Home prices down 1.2% y/y in Q4 2013

2.3 Industry and Trade
2.3.1 Business climate index up 4.6 points m/m in January
2.3.2 Industrial output rises 2.8% y/y in November 2013
2.3.3 Retail sales up 6.2% y/y in November 2013
2.3.4 Construction output shrinks 9% y/y in November 2013

2.4 Labor Market
2.4.1 Unemployment rate edges down to 11.3% in December 2013
2.4.2 Unemployment rate remains unchanged m/m at 12.9% in November 2013 - Eurostat
2.4.3 Bulgaria's unemployment rate to climb to 13.5% in 2014 - ILO

2.5 Tourism
2.5.1 Foreign tourist arrivals in Bulgaria rise 3.7% to 9.2mn in 2013

3. Fiscal Sector
3.1 Bulgaria's 2013 budget deficit at 1.8% of GDP, below 2% target
3.2 Bulgaria's end-Dec 2013 fiscal reserve drops 6.2% m/m to EUR 2.39bn but stays above limit
3.3 Bulgaria to issue EUR 460.2mn of debt paper in January 2014

4. Financial Intermediation
4.1 Banking sector net profit up 3.2% to EUR 299mn in 2013
4.2 Banking sector assets up 4% y/y to EUR 43.8bn at end-2013
4.3 Bulgarian banks' end-2013 capital adequacy ratio climbs y/y to 16.85%, above regulatory minimum
4.4 Share of bad loans in Bulgaria's banking sector rises to 17.3% at end-2013

5. External Sector
5.1 Current account swings to EUR 1.1bn surplus in Jan-Nov 2013
5.2 Foreign direct investment in Bulgaria down 30% y/y to EUR 1.2bn in Jan-Nov 2013
5.3 Trade gap shrinks 37% y/y to EUR 2bn in Jan-Nov 2013
5.4 Gross external debt falls 1.3% y/y to EUR 37.4bn at end-November 2013
5.5 Foreign reserves down 3.9% m/m to EUR 13.87bn at end-January

6. Politics
6.1 Center-right CEBD overtakes ruling Socialists as most popular party, new poll shows

Number of pages: 24
Release Date: Wed, 05 Feb 2014