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Bulgaria Business Forecast Report Q2 2010
Management Report
Published: February 2010
Pages: For full details, please email keithw@cmsinfo.com
Tables: For full details, please email keithw@cmsinfo.com
From: GBP 480.00 Buy Now!
Research from: Business Monitor International
Sector: Regional Markets
Bulgaria’s economic downturn accelerated during the third quarter of 2009, with the government’sinternal devaluation strategy exacerbating the deepening recession. Though certainly not as severeas some of the more precarious economies in emerging Europe, Bulgaria’s downturn will likelylinger further into 2010 owing to the ruling GERB party’s deflationist strategy, with fairly weak growthexpected in 2011. Furthermore, we caution that the emergence from recession will be marked byelevated unemployment and private sector balance sheet adjustment as households, firms andbanks pay down outstanding debts. With a return to pre-crisis growth levels not on the agendaover the medium term, and with unemployment lagging the recovery, we caution that support forthe government will deteriorate going forward.
Supporting its pre-election pledge to eradicate corruption and organised crime, Bulgaria’s newminority centre-right GERB (Citizens for European Development of Bulgaria) government has embarkedon an unprecedented graft-fighting drive since coming to power. However, we are concernedthat the government is focusing heavily on prosecuting public officials, rather than embarking onmore far-reaching reforms. Indeed, the fight to bring previous government officials to justice risksturning into a clampdown on opposition supporters, with GERB levelling blame at the BSP for themajority of Bulgaria’s political and economic problems. Progress on the broader economic reformfront, meanwhile, has been limited.
Having previously asserted that a balanced budget would be targeted in 2009, Bulgaria’s newcentre-right GERB government has conceded that it will now run a small deficit of BGN500mn,around 0.76% of GDP. We caution that fiscal slippage this year is indicative of ongoing politicalpressures, which are likely to mount further as unemployment edges higher. Indeed, though thegovernment had promised ahead of the July parliamentary election to restore the health of publicfinances, the deterioration in popular support since coming to power (which we previously warnedof) could limit the scope of fiscal tightening going forward.
I n line with the government’s broader anti-crisis strategy, Finance Minister Simeon Djankov hasindicated that Bulgaria will apply to join ERM-2 as early as March 2010, with a view to securingeurozone membership in 2013. While current eurozone members may be less keen to admitBulgaria amid the ongoing economic crisis, we note that the bloc will have little choice given thatthe Maastricht Criteria are likely to be satisfied. Though the government’s euro ambitions couldcertainly alter the outlook for the lev going forward, we nonetheless believe that it is too early totake out our nominal devaluation forecast from our core scenario. Instead, we stress that shouldBulgaria join ERM-2, the government may opt to devalue the currency within accepted limits in abid to help correct the currency misalignment.
Having previously asserted that a balanced budget would be targeted in 2009, Bulgaria’s newcentre-right GERB government has conceded that it will now run a small deficit of BGN500mn,around 0.76% of GDP. We caution that fiscal slippage this year is indicative of ongoing politicalpressures, which are likely to mount further as unemployment edges higher. Indeed, though thegovernment had promised ahead of the July parliamentary election to restore the health of publicfinances, the deterioration in popular support since coming to power (which we previously warnedof) could limit the scope of fiscal tightening going forward.
I n line with the government’s broader anti-crisis strategy, Finance Minister Simeon Djankov hasindicated that Bulgaria will apply to join ERM-2 as early as March 2010, with a view to securingeurozone membership in 2013. While current eurozone members may be less keen to admitBulgaria amid the ongoing economic crisis, we note that the bloc will have little choice given thatthe Maastricht Criteria are likely to be satisfied. Though the government’s euro ambitions couldcertainly alter the outlook for the lev going forward, we nonetheless believe that it is too early totake out our nominal devaluation forecast from our core scenario. Instead, we stress that shouldBulgaria join ERM-2, the government may opt to devalue the currency within accepted limits in abid to help correct the currency misalignment.