Bulgaria Business Projection Industry Update Quarter 3 2012

  • May 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Includes 3 FREE quarterly updates

Core Views
We expect Bulgaria’s economic growth to be weighed down by significantly weaker aggregate demand in the eurozone and persistent concerns over the eurozone debt crisis. We believe that the slowdown in external demand will weigh on Bulgarian exports, which, when combined with only moderate growth in household spending, will feed through to lower real Gross Domestic Product growth in 2012.
Politically, we expect 2012 to be a difficult year for the ruling party GERB. A combination of high public dissatisfaction with the government’s seeming lack of progress in the fight against corruption and failure to gain entry to the Schengen visa-free travel zone, combined with a weaker economic growth outlook will likely pose challenges to the government. That said, with the opposition unorganised and weak, we do not expect the government to lose its mandate in 2012. We projection the fiscal deficit to narrow to 2.0% of Gross Domestic Product in 2012, from an estimated 2.1% of Gross Domestic Product in 2011 as we expect Bulgaria’s government to continue with its fiscally prudent consolidation efforts. Restrained public spending will work to bring the deficit down, however, further increases in revenue intake will likely become hard to come by. There remains the risk for an expansion of government spending in the event that growth slows more precipitously than we currently projection .

Major Projection Changes
Significantly weaker external demand for Bulgaria’s exports and a domestic banking segment highly exposed to the eurozone sovereign debt crisis will continue to weigh on the country’s economic outlook in the coming years. We have revised down our Bulgarian real Gross Domestic Product growth projection for 2012 and 2013 to 0.6% and 1.9%, from 1.1% and 2.3% respectively.
The Bulgarian government will struggle to meet its 2012 budget deficit target of 1.3% of Gross Domestic Product, and we instead projection a deficit of 2.0%. That said, the government’s commitment to fiscal prudence is set to remain in place over the coming years and we believe investor sentiment towards Bulgaria’s sovereign debt is likely to keep the country’s borrowing costs in check in the years ahead. Bulgaria’s current account balance is set to flip back into deficit in 2012, as weaker external demand and elevated global energy prices take their toll on the country’s trade deficit. While we do not expect a negative shock to balance of payment stability in the near term as Bulgaria has ample foreign currency reserves, our projection for an average current account deficit of 2.5% of Gross Domestic Product to 2021 combined with our expectation for weak financial flows in the years to come could pose risks to longer-term external account stability.
Higher global energy prices are set to modestly push-up consumer price inflation (HICP) in Bulgaria, and we have revised-up our end- 2012 price growth projection to 2.2% y-o-y, from 1.8% previously. Despite the country effectively importing its monetary policy from the European Central Bank (ECB), we do not expect looser monetary policy to translate to significantly higher inflation, given our relatively downbeat outlook for domestic demand.

Key Risk To Outlook
A disorderly default in Greece would wreak economic havoc on Bulgaria whose economy is highly exposed to the beleaguered Hellenic nation via trade, investment and banking segment avenues. Although this risk is somewhat mitigated by recent developments, in the event of a deterioration in the eurozone sovereign debt crisis, we would be forced to revisit our projections for Bulgaria across the board.

Table Of Contents

Executive Summary 5

Core Views
...5
Major Projection Changes.5

Key Risk To Outlook
..5
Chapter 1: Political Outlook.. 7
Industry SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics 8
2013 Elections To Stall Reform Agenda.8
We do not expect Bulgarian Prime Minister Boyko Borisov recent cabinet re-shuffle to lead to major policy changes in the short term. In
particular, as the prime minister will avoid unpopular reforms with parliamentary elections in 2013 now in sight. That said, Borisov will
continue to highlight his government's commitment to spur longer-term reforms and attract investment, in line with increased scrutiny by
the EU, and we expect a ruling party victory in 2013.
TABLE: POLITICAL OVERVIEW....8
Long-Term Political Outlook. 10
Challenges Remain Despite EU Membership10
We expect EU membership to remain key to Bulgaria's long-term political outlook, helping to underpin investor sentiment in the country
and steady economic growth. However, we note that despite having already joined the bloc, Bulgaria has a number of challenges it must
yet tackle to improve its business environment and help ensure a more stable economic and political situation over the next 10 years.
Below we draw attention to these challenges and outline possible scenarios for political change.
Chapter 2: Economic Outlook.. 13
Industry SWOT Analysis ... 13
BMI Economic Risk Ratings.. 13
Economic Activity... 14
Significantly weaker external demand for Bulgaria's exports and a domestic banking segment highly exposed to the eurozone sovereign
debt crisis will continue to weigh on the country's economic outlook in the coming years. We have revised down our Bulgarian real Gross Domestic Product
growth projection for 2012 and 2013 to 0.6% and 1.9%, from 1.1% and 2.3% respectively.
TABLE: ECONOMIC ACTIVITY....14
Monetary Policy.. 17
Elevated World Energy Prices To Push Inflation Higher.17
Higher global energy prices are set to modestly push-up consumer price inflation (HICP) in Bulgaria, and we have revised-up our
end-2012 price growth projection to 2.2% y-o-y, from 1.8% previously. Despite the country effectively importing its monetary policy from
the European Central Bank, we do not expect looser monetary policy to translate to significantly higher inflation, given our relatively
downbeat outlook for domestic demand.
TABLE: INFLATION..18
Fiscal Policy... 19
Healthy Fiscal Dynamics Ahead.19
The Bulgarian government will struggle to meet its 2012 budget deficit target of 1.3% of Gross Domestic Product, and we instead projection a deficit of 2.0%.
That said, the government's commitment to fiscal prudence is set to remain in place over the coming years and we believe investor
sentiment towards Bulgaria's sovereign debt is likely to keep the country's borrowing costs in check in the years ahead.
TABLE: FISCAL POLICY....19
Balance Of Payments... 21
Return To Current Account Deficit Portends Financing Difficulties...21
Bulgaria's current account balance is set to flip back into deficit in 2012, as weaker external demand and elevated global energy prices
take their toll on the country's trade deficit. While we do not expect a negative shock to balance of payment stability in the near term as
Bulgaria has ample foreign currency reserves, our projection for an average current account deficit of 2.5% of Gross Domestic Product to 2021 combined with
our expectation for weak financial flows in the years to come could pose risks to longer-term external account stability.
TABLE: CURRENT ACCOUNT22
Eurozone Monetary Policy ... 23
ECB Still In Demand As The Only FireFighter In Town23
The European Central Bank will remain in fire fighting mode for the foreseeable future despite claims from some quarters that the debt
crisis has been put to bed - a prognosis that we believe will prove premature. We expect the central bank to provide additional liquidity
through its long-term refinancing operations as well as direct purchases of government bonds in the secondary industry, though both
could prove somewhat ad hoc and reactive.
Chapter 3: 10-Year Projection 25
The Bulgarian Economy To 2021.... 25
More Weakness In The Next Decade ...25
The Bulgarian economy is set to remain on a low growth trajectory over the next decade. Despite ongoing private segment deleveraging,
we do not expect credit growth to pick up over the next 10 years, while slower export growth, a very weak business environment and a
lack of much-needed reforms will weigh on investment and economic growth.5
TABLE: LONG-TERM MACROECONOMIC FORECASTS.25
Chapter 4: Business Environment 29
Industry SWOT Analysis ... 29
BMI Business Environment Risk Ratings 29

Environment Overview Outlook. 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS..30
TABLE: BMI LEGAL FRAMEWORK RATING..31
TABLE: LABOUR FORCE QUALITY.32
Infrastructure 33
Market Orientation .. 34
TABLE: EMERGING Euros OPE - ANNUAL FDI INFLOWS..34
TABLE: TRADE AND INVESTMENT RATINGS....35
Operational Risk. 36
TABLE: TOP EXPORT DESTINATIONS36
Chapter 5: Key Segments ... 39
Defence and Security.. 39
TABLE: BULGARIA'S MANPOWER AVAILABLE FOR MILITARY SERVICES, from 2009 to 2016 (AGED 16-49, UNLESS OTHERWISE STATED).40
Freight Transport 41
TABLE: BULGARIA'S DEFENCE EXPENDITURE, from 2009 to 2016 41
TABLE: AIR FREIGHT, from 2007 to 2016 ....44
TABLE: MARITIME FREIGHT - PORT OF VARNA, from 2007 to 2016 ....44
Other Key Segments ... 45
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS45
TABLE: AUTOS SECTOR KEY INDICATORS.45
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS..45
TABLE: OIL AND GAS SECTOR KEY INDICATORS46
TABLE: PHARMA SECTOR KEY INDICATORS...46
TABLE: TELECOMS SECTOR KEY INDICATORS....46
Chapter 6: BMI World Assumptions. 47
World Outlook.... 47
World Economy Continues To Muddle Through ...47
TABLE: GLOBAL ASSUMPTIONS....47
TABLE: DEVELOPED STATES REAL Gross Domestic Product GROWTH FORECAST.48
TABLE: REAL Gross Domestic Product GROWTH CONSENSUS FORECASTS...48
TABLE: EMERGING MARKETS REAL Gross Domestic Product GROWTH FORECAST49

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