RaboResearch - Economic Research

Country Report Bulgaria

Country Report


Flag Bulgaria

Growth in Bulgaria remains weak and fiscal balances have been deteriorating, though from a low base. The banking sector has weathered last year’s crisis well, but further measures are necessary to improve its resilience in the future. 

Strengths (+) and weaknesses (-)

(+) Track record of fiscal prudence

Modest public surpluses / deficits 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. However, recent fiscal slippage, if not addressed, could weaken the fiscal position.

(-) Persistent corruption and cronyism

Persistent corruption and cronyism hurt the business environment. Moreover, there is widespread discontent with governance issues and the close ties between politicians and business oligarchs.

(-) Continuous political instability

The Bulgarian political elite’s commitment to the common good is perceived to be weak, which tends to affect policy acceptance by the public. Government stability has been very weak in recent years amid recurrent mass protests.

(-) Debt overhang constrains growth

Corporate debt levels in Bulgaria are high, at 122% of GDP in 2013 and that constrains growth. Besides, a high level of external financing (external debt was 98% of GDP and the net international investment position was -79% of GDP in 2014) makes Bulgaria vulnerable to currency depreciation and foreign investment sentiment. A fairly high share of cross border intercompany lending provides some comfort. 

Key developments

1. Banking crisis aftermath

The banking sector weathered last year’s crisis fairly well and steps that could reduce current weaknesses have been taken, but further measures are needed to improve resilience in the future. In 2014, Bulgaria’s third and fourth largest banks suffered from bank runs. One of them, Corporate Commercial Bank (CBC) lost its license in November 2014 as a result of irregularities revealed by a thorough audit. The crisis did not hurt deposits, which in December 2014 were 1.5% higher than a year earlier, despite the lower interest rates. However, the bank sector crisis revealed significant shortcomings of banking supervision. From that perspective, it is positive that a Basel Core Principles assessment by the IMF and the World Bank had been planned for the end of March. Irregularities on reporting and lending practices at CBC raised concerns about the actual health of domestically-owned banks, as asset quality might be overestimated and non-performing loans might be underestimated. The Asset Quality Review, expected in late 2015, is therefore an important milestone. The CBC case also revealed shortcomings in the bankruptcy law, which triggered the government to amend it and improve creditor protection and asset recovery. Nevertheless, despite steps in the right direction such as the ones mentioned above, further measures are required to improve banking sector resilience in the future. Especially since this resilience might be tested in the short term by the planned assessments and eventual problems in the Greek banking sector, which accounts for roughly one fifth of assets in the sector.

2. Growth remains subdued

Economic activity strengthened in 2014, but is not expected to be sustained in coming years. At 1.7% in 2014, economic growth picked up from 1.1% in 2013, but remains below the 6% average recorded before the crisis in 2008/2009. The main growth drivers were domestic, namely government consumption, private consumption and gross fixed investments, though political uncertainty and a bank sector crisis hurt sentiment and economic activity in the second half of the year. Gross fixed investment was driven by public investments on the back of increased absorption of EU structural funds. External demand had a negative contribution to growth, as the impact of the Ukraine-Russia conflict outweighed the strengthening of demand from the EU.

Figure 1: Growth remains weak
Figure 1: Growth remains weakSource: EIU, EC
Figure 2: Fiscal balances worsen
Figure 2: Fiscal balances worsenSource: EIU

Disinflationary pressures that started in 2013 persisted in 2014, supported by administered prices and other one-off effects. The disinflationary environment is expected to persist in 2015 and hurt investment, given the backdrop of very high corporate debt levels. Growth is expected to weaken to 0.8% in 2015, as fiscal consolidation will hurt both government and private consumption, though the latter should also suffer from adverse demographic developments. Meanwhile, gross fixed investment will contract as public investment programmes approach completion.

3. Fiscal balances deteriorate, though from a low base

A structural deterioration of the budget deficit and support to the banking sector caused the public debt to soar, though from a low base. Expenditure overruns and disappointing revenue, aggravated by deflation and temporary suspension of EU funds, caused the budget deficit to more than double to 3.8% of GDP in 2014. Financing the shortfall, debt roll-over and loans to the banking sector caused public debt to skyrocket, from 18% of GDP in 2013 to 27% of GDP in 2014. Despite consolidation measures, in 2015, the budget deficit is estimated to remain high at 2.9% of GDP and public debt is expected to reach 30% of GDP. Besides, risks are tilted to the downside, as the fiscal position could further deteriorate due to the aftermath of the banking crisis, a poor financial situation of state owned enterprises and an increasing public burden in the health and pension systems as the population is ageing and emigrating. Still, public debt remains far below the 60% of GDP EU threshold and domestic and international demand for sovereign debt remains strong, and that mitigates risks in the short to medium term.

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 2013, 48% of the population was at risk of poverty or social exclusion. EU accession gave Bulgaria access to European funds for development. Yet, 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 years. The Bulgarian population has fallen markedly in the past two decades, decreasing by 22% to 7.2m over 1990-2014, 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 around 70% of total banking assets. Around one fifth of assets are owned by Greek banks. The sector is well capitalised and liquid, but provisions related to a large share of non- performing loans - 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 executive power, while the directly elected president fulfils a non-executive function. Particularly in recent years, government stability has been weak, as Bulgaria’s economy struggled to recover from its deep recession in 2009. A weak rule of law, persistent corruption and organised crime are major issues that have impeded approval for the aspired membership to the 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 will be postponed until after the eurozone has stabilised.

Economic indicators of Bulgaria
Economic indicators of BulgariaSource: EIU, EC (* 2015 & 2016 forecasts)
Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
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