RaboResearch - Economic Research

Country Report Bulgaria

Country Report


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In 2013, Bulgaria was plagued by social unrest related to discontent with the high level of corruption amongst politicians. However, the economy benefitted from stronger external demand. 

Strengths (+) and weaknesses (-)

(+) Track record of fiscal prudence

Modest public surpluses/ deficits recorded in the past two decades have resulted in a low level of public debt, which allows the authorities to adopt an expansionary fiscal stance when needed.

(-) Persistent corruption and cronyism

Persistent corruption (the country ranked lowest in the EU on the Corruption Perception Index) and cronyism hurt the business environment. Moreover, there is widespread discontent with governance issues, particularly with the close ties between politicians and business oligarchs.

(-) Regional concentration of commercial relations

Bulgaria has close commercial ties with the EU, which accounts for more than 60% of exports and of FDI stock. Hence, it is very susceptible to economic shocks in the EU.

(-) Ageing population

In the period 2013-2050, the share of the working population in the total population is expected to decline from 67% to 50%, while the share of those aged 65 and older will increase from 19% to 33%. These age structure shifts are poised to hurt growth and increase the burden on the public budget.   

Key developments

1. Political instability is high and hurts the investing climate and the policy direction

Political uncertainty has persisted after the early elections in May 2013, as several decisions by the newly elected government triggered widespread protests and the new government resorted, in response, to more populist measures. Increases in energy prices, against a backdrop of low living standards, high energy bills (61% of the population is ‘energy poor’ and spends more than 10% of household resources on energy – the second highest rate in Europe) and distrust of a corrupt public (energy) sector led to mass protests in February 2013. The government led by the centre-right GERB party resigned and early elections were held on 12 May. After elections with an inconclusive outcome, a weak coalition was formed between the centre-left BSP party and the MRF, a Turkish minority party. This coalition lacks majority in parliament and therefore relies on the support of the ultra-nationalist Ataka party. Social unrest resumed soon after the appointment of the new cabinet, as controversial appointments of senior officials triggered a new wave of anti-government protests in June 2013. Persistent demonstrations and results of recent opinion polls indicate the ruling coalition enjoys little support. Besides, Ataka is believed to withdraw support if it gains substantial popularity in opinion polls. Consequently, the ruling government is at high risk of not completing its term. The European Parliament elections in May 2014 represent an important milestone. In the meantime, trying to appease the protesters, the ruling coalition has adopted a wide range of populist policies, such as several energy price reductions and other increases in social spending, a stop to privatisations and even  the nationalisation of ailing private companies to stem job losses. Lingering political uncertainty and increasing state intervention are thus set to discourage investors.

2. The public deficit soars, but public finances remain sound

The public deficit soared from 0.5% of GDP in 2012 to 1.8% in 2013, according to preliminary data. As the deficit is still modest and public debt remains low (estimated at 18% of GDP in 2013), there is no threat to Bulgaria’s fiscal sustainability. The somewhat more expansionary fiscal stance in 2013 was mainly attributable to increases in social expenses, such as an increase in energy subsidies for poor families and pension hikes. Looking forward, the budget deficit is expected to decrease to about 1.5% of GDP in 2014. However, contingent liabilities of state-owned companies in the energy and railroad sectors  and the costs associated with a further increase in populist measures pose serious downside risks to the forecast. On the positive side, though aided by one-off measures, the 2013 budget deficit was kept just below the 2% of GDP target, indicating the government is committed to Bulgaria’s tradition of fiscal prudence.

3. Economic recovery is fragile and structural unemployment persists

Following an external credit driven boom, which burst during the global financial crisis of 2008/2009, the Bulgarian economy has been rebalancing. In 2013, economic growth slightly decreased to 0.6%, from 0.8% in 2012, on the back of a contraction in private consumption. High unemployment, tight credit conditions and uncertainty continued to depress demand. Better than expected exports, increased public consumption and a good harvest were supportive of growth. Unemployment worsened slightly in 2013, as it increased to an estimated 11.6%, up from 11.1% a year earlier. However, the deterioration was caused by an increase in the workforce, while employment growth turned positive for the first time since 2008. Looking forward, in 2014, economic growth is expected to pick up to 2.2%, supported by a recovery of the European economy, and unemployment is expected to decline to 11.1%, as employment further picks up. However, the fragility of the EU recovery, especially in the periphery, which maintains close commercial ties with Bulgaria, and the political uncertainty at home pose downside risks to this outlook. Consequently, the recovery of the Bulgarian economy remains fragile. 

Figure 1: Growth is lacklustre
Figure 1:Growth is lacklustreSource: EIU
Figure 2: Current account dips into black
Figure 2: Current account dips into blackSource: EIU

4. Current account into the surplus and external position improves

In 2013, the current account balance turned positive and external debt declined, marking an improvement in Bulgaria’s external position. Bulgaria is estimated to have booked a current account surplus of 1% of GDP in 2013, up from a deficit of 1.3% of GDP a year earlier. The improvement of the balance was supported by strong export growth (5.6% yoy), and modest import growth (2.4% yoy), on the back of weak domestic demand and an upsurge in the transfer of EU funds due to a pick-up in infrastructural projects and agriculture subsidies. In the aftermath of the credit driven boom that ended in 2008/2009, Bulgaria had a high level of external debt of 112% of GDP in 2009. The fact that around 60% of the external debt in recent years is represented by intercompany lending provides comfort. Moreover, it is positive that private sector deleveraging brought foreign debt down to 96% of GDP, from 100% of GDP in 2012, with banks reducing their external liabilities to 16% of GDP, from a high 27% in 2008, and booking a positive net foreign asset position for the first time since 2006. Bulgaria’s external debt is forecast to fall further in the coming years. 

Factsheet of Bulgaria
Factsheet of BulgariaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Bulgaria joined the European Union in 2007 and is its poorest member, with a GDP per capita just below half the EU average. Moreover, in 2011, 49% the population was at risk of poverty or social exclusion, according to data from Eurostat. EU accession gave Bulgaria access to European funds for development. But, due to government capacity constraints the absorption rate of these funds is one of the lowest in the EU, though improvement has been booked in the past three years. The Bulgarian population has fallen markedly in the past two decades, decreasing by 22% to 7.2m over 1990-2013, on the back of a low fertility rate, a stagnant life expectancy and one of the highest emigration rates in the world. The Bulgarian economy is fairly open. Bulgaria is a net exporter of services, on the back of its tourism and transportation sectors. The banking sector is dominated by subsidiaries of EU companies, which account for 75% of the banks. The sector is well capitalized and liquid, but provisions related to a large share of non- performing loans (17%) - a legacy of the pre-2008/2009 credit boom - hurt margins.

Following a period of more than 40 years in which Bulgaria was a satellite of the Soviet Union, Bulgaria’s communist regime collapsed in 1989. The country became a parliamentary republic in 1991. The government holds the executive power, while the directly elected president fulfils a non-executive function. Bulgaria has been ruled by different coalitions since 1991, but the political system is relatively stable. A weak rule of law, persistent corruption and organized crime are major issues, and have impeded approval for the aspired membership to the passport-free Schengen area. In 1997, Bulgaria introduced a currency board and pegged the Lev to the Euro. The Bulgarian government has stated that ERM II membership would be postponed until after the Eurozone crisis had stabilized. 

Economic indicators of Bulgaria
Economic indicators of BulgariaSource: EIU

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