bulgaria: economic performance, prospects and risks craig otter, economist intelligence unit may 11...
TRANSCRIPT
Bulgaria: Economic Performance, Prospects and Risks
Craig Otter, Economist Intelligence Unit
May 11th 2007
Growth robust and stable
-15
-10
-5
0
5
10
15
1996 1998 2000 2002 2004 2006
Net trade
Investment
Public exp
Private exp
Actual growth
Real GDP growth, % and contributions, pp
Falling unemployment
02468
101214161820
1996 1998 2000 2002 2004 2006
Unemployed persons, % of labour force
Moderating price and wage inflation
02468
101214161820
CPI
Wages
Consumer price index and wages, average % change
Supportive fiscal policy
-12
-10
-8
-6
-4
-2
0
2
4
1996 1998 2000 2002 2004 2006
Government budget balance, % GDP
Credit expanding fast, but level low
-10
-5
0
5
10
15
20
25
30
35
1996 1998 2000 2002 2004 2006
0
20
40
60
80
100
120
Growth (Left axis)
% GDP (Right axis)
Growth in domestic credit stock
External weakness growing
-25
-20
-15
-10
-5
0
5
10
15
1996 1998 2000 2002 2004 2006
CA balance
Trade balance
External balances, % of GDP
Overall debt dynamics favourable
0
20
40
60
80
100
120
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Private sector
Public sector
External debt, % GDP
Foreign capital inflows booming
0
1000
2000
3000
4000
5000
6000
1996 1998 2000 2002 2004 2006
Foreign Direct Investment, US$mn
FDI shifting focus
ConstructionFinancial
intermediation
Manufacturing
Transport, storage and communication
Wholesale and retail trade etc.
Other
FDI by sector, average share of total FDI in 1997-98
FDI shifting focus (continued)
Construction
Energy
Financial intermediation
Manufacturing
Real estate, renting and business
activities
Wholesale and retail trade etc.
Other
FDI by sector, average share of total FDI in 2005-06
Capital investment driving potential output
-30-25-20-15-10-505
10152025
1996 1998 2000 2002 2004 2006
Capital
TFP
Labour
Potential output
Growth in labour, capital and total factor productivity, %
Business environment improves
0
10
20
30
4050
60
70
80
90100
UK LT EE DE LV FR SK RO CZ BG SQ HU PL IT RU
2007
2006
World Bank Ease of Doing Business Rank (1 = highest)
Catch-up proceeding slowly
0
10
20
30
40
50
60
70
80
90
1989
1991
1993
1995
1997
1999
2001
2003
2005
EU-27
CEE
Ratio of Bulgarian to EU-27 and CEE GDP per head at PPP
Catch up: GDP per head, EU15=100
0
10
20
30
4050
60
70
80
90C
zech
Hu
ng
ary
Po
lan
d
Slo
vaki
a
Slo
ven
ia
Bu
lgar
ia
Ro
man
ia
Cro
atia
Ser
bia
Est
on
ia
Lat
via
Lit
hu
ania
2005
2025
EU15 growth at 2% pa
Currency board
Reserves have been rebuilt since 1996-97 Authorities were unable to prevent financial crisis in 1996-97 and decline in
external value of the lev
Peg has been in place since July 1997 Currency pegged to D-Mark and currency restrictions introduced Anchor currency shifted to euro in 1999, restrictions lifted in 2000 Base money is matched by foreign reserves
Elements of currency board A fixed exchange rate between lev and euro (BGN1.96=EUR1.00) Convertibility of lev A long-term commitment to the system by the authorities
Threats to currency board contained for now Disinflation and euro weakness have mitigated real appreciation pressures
under currency board system since 1997 However, rising price pressures and weaker US dollar against euro in 2006-
07 have suggest real appreciation could place currency board under strain
Currency board
0
2000
4000
6000
8000
10000
12000
1996 1998 2000 2002 2004 2006
Intl. reserves
M1
Reserves and the monetary base (US$ m)
M1 includes demand accounts
Economic prospects
Strong GDP growth Inflation resumes downward momentum Fiscal policy remains tight Monetary policy dedicated to currency board Even if lev appreciation, cost-advantage remains Large current-account deficits Manageable external debt service Strong, though falling, FDI inflows High levels of reserves Continuation of reforms
Real GDP growth, %
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Eastern Europe
Growth to remain rapid
Inflation, average annual %
0
1
2
3
4
5
6
7
8
2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Euro zone
Disinflation to continue
Current account balance, % GDP
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Eastern Europe
External weakness to persist
Net FDI inflows, US$bn
0
1000
2000
3000
4000
5000
6000
7000
8000
2002 2003 2004 2005 2006 2007 2008 2009
Hungary
Bulgaria
FDI receipts to start falling
Net FDI inflows, as % of GDP
0
2
4
6
8
10
12
14
16
2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria
Hungary
FDI receipts to start falling (continued)
Economic risks
Managing underlying vulnerabilities External deficit
Continuing structural reform post-EU Maintaining reform momentum after EU accession
A very poor demographic outlook Need to review labour market incentives
Growth challengecan +5% pa growth be sustained?
Net FDI inflows, % of Current account balance
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CA deficit financing has deteriorated
External deficit
Has grown partly as a consequence of FDI inflows This has been shown to a be key factor in supporting income convergence … but economic vulnerability is higher nonetheless
Private sector foreign borrowing is more worrying Need to monitor risks allied to foreign borrowing
Export performance crucial Although non-trade elements of CA have also deteriorated, hopes for
improving external stability rest with a recovery of exports Data certainly no clear price- or wage-based competitiveness concerns But continuing structural reforms needed to ensure state enterprises are
restructured
Sustainability threat not obvious IMF research suggests that CA imbalance is broadly consistent with
Bulgaria’s stage of economic development
Price competitiveness
Gross monthly wages, US$
Predicted Actual Act/pr Predicted Actual Act/pr
Czech 685 701 1.02 Bulgaria 268 190 0.71
Hungary 725 719 0.99 Romania 242 253 1.04
Poland 619 627 1.01 Albania 206 236 1.14
Slovakia 661 491 0.74 B & H 372 475 1.28
Slovenia 1,398 1,478 1.06 Croatia 666 922 1.49
Estonia 636 573 0.90 Macedonia 345 421 1.22
Latvia 450 390 0.87 Serbia 257 350 1.36
Lithuania 570 472 0.83
“Equilibrium wages” estimated or predicted on the basis of a relationship between wages and productivity (output per employed, at PPP) and several other variables, across 70 economies.
EU membership and growth
Positive Reinforces political stability, reduces risksImpact on trade/FDI; removal of residual trade barriers Institutional development aided, albeit over long time frameEncourages macro policy disciplineEU funding for infrastructure development
Negatives Membership removes reform anchorMuch of acquis inappropriate for less developedHarmonisation pitfalls
- EU social and environment regulation
- Pressure for tax harmonisationStability or growth bias
• EU entry offers a possibility, not a guarantee of stimulating per-capita GDP convergence
• Key assumptions: trade integration; macro stability and price competitiveness; further deregulation; slow institutional improvement
• Modest pace of convergence. On baseline forecast, by 2025 Bulgaria reaches about 40% of EU-15 average income per head, from less than 30% at present
• Despite post-accession benchmarking, risk that Bulgaria’s commitment to EU-related reform weakens in line with greater political disunity
EU membership and growth
A declining and ageing population
0
1000
2000
3000
4000
5000
6000
7000
8000
2004 2025 2050
0
10
20
30
40
50
60
70
80
90
65+ (Left axis)
15-64 (Left axis)
0-14 (Left axis)
Ratio (Right axis)
Population by age group, thousandsand dependency ratio
• Bulgaria’s population has been declining for more than a decade
• It is projected to decline by another 24% by 2035 and the working-age population by 31%
• Policies needed to encourage higher labour market participation
• Incentives need to be reviewed to ensure that participation in the labour force is more effectively encouraged
• The IMF has called for a “release of excess staff from the public sector”, which it believes would lead to higher labour supply to the private sector
• Poor demographics shared by most CEE states, a produce of net migration and negative natural population increase
Adverse demographics
Assessment of currency board risks External deficit
Much of the external deficit is consistent with Bulgaria’s stage of economic catch-up Non-debt creating finance (FDI) has helped to finance current account deficit, but financing is expect to
deteriorate
Public finances Very restrictive (budget balance in surplus since 2004, primary balance in surplus since 1994). Fiscal overperformance has been used to build up a huge fiscal reserve, and has used this to make
early repayments of public sector external debt.
Private sector debt accumulation Perhaps most worrying aspect of recent economic developments rivate sector component has been rising rapidly, while public sector component has been coming down
because of the government's aggressive prepayments. Private sector credit growth a concern
Debt structure 75% of Bulgaria's external debt in euros. No large market of BGN-denominated instruments to serve as
a channel for forcing currency adjustment. Portfolio inflows (hot money flows) are relatively minor.
Banking sector
Overwhelmingly under foreign control and improving in terms of profitability and stability.
Summary of challenges
Nature of challenge
Growth Keep well-balanced
Inflation Emerging energy dependence could increase inflation
Fiscal policy Maintain tight fiscal policy
Monetary policy Preserve currency board despite large external deficit, manage credit growth and banking sector risk
External sector Manage and reduce vulnerability
FDI Ensure opportunities for greenfield investment when privatisation program comes to an end
Competitiveness Address problem of falling working-age population, invest in R&D to decrease reliance on labour-cost advantages
Business environment Need to further improve institutions and regulations