Bulgaria: economy at the freezing point

The Bulgarian economy has been stagnating for a third consecutive year. The only economic sectors where an increase was marked were agriculture and industry. A total overview of what is being produced and sold in this country shows that the export-oriented industry is still functioning well, sells its produce abroad and even generates a slight growth. On the other hand, the sector which has also been performing well is tourism which marked an increase in 2012. As a whole, the rest of the Bulgarian economy has been sending worrying signals and the trend of development there is negative. 

What does data from this statistics shows?

The Bulgarian economy grew by only 0.8% in 2012, which is twice less than in 2011. Let alone the forecast of the Bulgarian government in resignation which predicted an economic growth of 2.9%. With regard to gross domestic product, Bulgaria has remained last in the European rankings. The gross domestic product (GDP) is the main economic indicator for the productiveness and the living standard of the population. The investments in the Bulgarian economy in 2012 were also below the expectations. However, they have had great contribution to the Bulgarian GDP as they marked an increase of 1.5% year on year. According to Desislava Nikolova, there is a lack of steady trend with regard to growth in investments. “We think that a serious recovery of the economic growth and the investment streams in the local economy can only happen if the levels of foreign direct investments (FDI) reach the ones before the economic crisis.” Experts comment that the business will wait the results of the Parliamentary elections and then it will decide on its investment policy. There was also a growth in the consumption by 1.3%, which is quite insufficient though. Over the last quarter, the situation on the labor market remained hard. The statistics about the labor force shows that the number of unemployed has been increasing.

The political crisis has also reflected negatively on the economic processes.

There are comments about postponed or hampered investment projects by foreign investors as well as by the local business. So, the quicker the political stability is restored in Bulgaria, the sooner the economic activity in this country will recover. It is of great importance for Bulgaria to have a stable government in three months, because it would guarantee the economic stability and a better economic growth. We need a stable government after the official elections. It has to make urgent reforms so that the business can feel some relief. This is the main prerequisite for a future economic growth. 

Bulgaria’s economy failed to sustain a recovery course in the environment of an enduring debt debacle in Europe and a lasting instability in international financial markets. The weakening of economic activity which could be observed in the final months of 2011 continued in 2012, as well. The main factor behind this was the sharp deterioration in export performance which in itself mirrored weak demand in Europe. Consequently net exports made a negative contribution to GDP growth in the first quarter, reversing the situation prevailing in the period 2009-2011. By contrast, domestic demand made a positive contribution to GDP growth in the first quarter, mostly thanks to a modest upturn in private consumption. 

Overall, it is difficult to draw far-reaching conclusions from these facts as the economy remains close to the freezing point, with quarterly GDP growing by a 0.9% year on year according to preliminary statistics. However, the preliminary national accounts data tend to be rather unreliable. For example, these data suggest that real aggregate value added produced in the Bulgarian economy in the first quarter dropped by 0.9% from the same period of 2011. The reported positive GDP figure was exclusively due to a large positive contribution of FISIM (financial intermediation services indirectly measured), which is an adjustment item in the System of National Accounts. Moreover, different short-term indicators point to different directions of recent trends that are in some case the opposite of those implied by the quarterly national accounts data. Thus real retail sales in the first quarter were on the decline year-on-year while national accounts point to an increase in private consumption. Similarly, national accounts suggest a year-on-year increase in value added produced in construction, while according to monthly data quarterly gross construction production fell from the same period of 2011. 

The most disappointing recent development has been the weakening in export performance, which had kept the economy afloat during the past couple of years. In the first quarter of 2012, the growth of merchandise exports was negative (albeit slightly) both in nominal and in real terms for the first time since 2009. In this period, the biggest retrenchment was recorded in exports to the EU, while exports to third parties were less affected. Mirroring this, manufacturing output also went into the red in the first quarter. By contrast, after almost two years of decelerating, imports growth, imports started picking up speed in the first months of 2012.

The divergent trends in export and import performance affected the dynamics of Bulgaria’s external balances and since the beginning of 2012 the current account has been in the negative territory. Overall, net capital outflow continued in the first months of 2012, mostly due to the ongoing amortization of loans borrowed externally by commercial banks and very little, if any at all, new such borrowing. Consequently, gross foreign debt also continued to fall. At the same time, there have been no signs of an invigoration of FDI

inflows. 

The negative shocks experienced during the crisis have largely been transmitted to the labor market which acted as one of the main shock absorbers in the Bulgarian economy. With some lags, these negative effects continue to pass through and, given the failure of the economy to embark on a path of sustained recovery, net job destruction still prevails as a trend. Hence, unemployment was on the ris, although seasonal factors may reverse this in the summer months. 

Another worrisome development has been the continuing deterioration in commercial banks’ portfolios due to a persistent rise in substandard loans. Overall, credit activity remains very subdued and selective, both due to the uncertain economic prospects and the liquidity constraints that banks themselves are facing: with the drying up of external funding, savings in bank deposits have become the main source of new funds. Against this backdrop, the share of non-performing and restructured loans kept rising in the opening months of 2012 and reached 18.6% of total loans in April, up from 15.2% a year earlier and an average of 16.2% for 2011 as a whole. 

Nevertheless, the banking system as a whole remains relatively stable thanks to its high degree of capitalization as required by local regulations which are considerably tougher than Basle-2 requirements. Thus, at the end of 2011, the average capital adequacy ratio of the commercial banking system in Bulgaria was 17.5% which allowed most banks facing bad loans problems to provision heftily without suffering a serious burden. Anyway, 10 out of 31 commercial banks in Bulgaria reported a loss for 2011 as a whole.

Fiscal policy remains as one of the most controversial aspects of macroeconomic management in Bulgaria. In terms of its fiscal balance, Bulgaria can appear as one of the “star performers” in the EU as, with the exception of the years 2009-2010 it has not only been within the 3 per cent deficit range but actually had been reporting fiscal surpluses from 2004 to 2008. However, the rationale of Bulgaria’s fiscal policy has often been disputed. The two questions that have been posed most often are: 1) Whether the degree of fiscal austerity in Bulgaria was really justified? and 2) Whether the allocation of public spending within the targeted fiscal position was efficient?

The answers to both questions are not straightforward. While there were good reasons to maintain a fiscal surplus during the boom years (in line with the structural fiscal balance), the degrees of fiscal austerity during the crisis years are probably more difficult to justify, moreover given the very low level of public debt in the country. Targeted one-off policy measures during this period could probably have helped for a certain dampening of the negative external shocks. In this sense, the unduly tight fiscal stance has probably resulted in growth and employment sacrifices in this period.

What is even more debatable is the internal adjustment of public spending within the targeted overall balance. In the first place, fiscal policy in recent years has suffered from very low transparency. Thus the current government (in power since 2009) never declared its concrete policy priorities during its mandate (especially, during the crisis) and how these would translate into public spending. In addition, the government has throughout its term in office avoided unpopular large-scale fiscal measures and therefore major structural reforms have continuously been put on hold. By contrast, on several occasions, the government did retreat into populist moves under pressure from the streets. Thus de facto public spending – and spending cuts – have been a reflection of what the government could commit within a generally austere fiscal stance with least resistance from the public.

The fiscal policy stance implied by the 2012 budget and currently being executed by the government follows the same paradigm. The main victim of this political economy has

been public investment financed from national sources, which has suffered continuous subsequent cuts since 2009. A certain increase in the absorption of EU investment funds in 2010 and 2011 could not compensate for the cutbacks in local financing. In this sense, the government de facto abandoned one of the few instruments available at its disposal for providing support to economic activity in the country, adding to the growth and employment sacrifices attributable to economic policy.

In the present circumstances, most factors point to continuing sluggishness in economic activity in the short run. Exports keep losing their momentum while there are no signs pointing towards a more proactive domestic policy stance. Investor sentiment remains subdued. The possible modest recovery in private consumption will hardly be sufficient to act as a visible growth driver. Adding to that the prevailing overall economic weakness in Europe, most likely Bulgaria’s economy will be close to stagnation in 2013 taken as a whole. In the absence of more pro-active policy measures it is also difficult to expect a notable amelioration in the labor market situation.

Under the currency board straightjacket, Bulgaria’s economy – and its growth prospects –are largely a hostage of capital inflows and these are unlikely to materialize in the coming

years. Therefore the most likely medium-term scenario is probably the switch to a rather moderate growth path.

Nataliya Timova

Source: wiiw Database incorporating Eurostat and national statistics. Forecasts by wiiw.

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1ºciclo) da EGG/UMinho]