Quarterly revision of the macroeconomic projections

Dimitar Bogov Governor

May, 2013

CONTENTS

• Macroeconomic projections for 2013 -2014

• External assumptions

• Main macroeconomic scenario for 2013 -2014

• Comparison with the previous projection

Macroeconomic projections for 2013-2014

External environment

In the period between the two projections, improvement

in the global economic perceptions has generally been registered, given stabilization on the financial markets

However, the expectations for activity reduction in the Euro area in 2013 and moderate recovery in 2014 stayed on, in conditions of the new “debt tremors”, destructed monetary transmission, uncertain ambient and low confidence level

Foreign demand

Expectations for slightly deeper decrease in the foreign effective demand in 2013

compared to the previous projection and its moderate recovery in 2014, which is in line with the January projection

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

2010 2011 2012 2013 2014

Foreign effective demand(annual growth rates, %)

January 2013 April 2013

0.4 -0.5

-1.7

0

-0.6

1.00.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014

Decomposition of foreign effective demand growth(weighted contributions to annual foreign effective demand growth rates)

Croatia

Bulgaria

Serbia

Netherlands

Italy

Spain

Greece

Germany

Belgium

Foreign effective inflation

In the first quarter of 2013, the foreign effective inflation beyond the expectations

Minimal upward revision for 2013 and moderate upward correction for 2014

Expectations for more significant acceleration of the annual foreign effective inflation dynamics in 2013 and its moderate deceleration in 2014

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014

Foreign effective inflation(annual rates, %)

January 2013 April 2013

1.33.4

3.5

4.2

2.7

1.42.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014

Decomposition of foreign effective inflation(weighted contributions to annual foreign effective inflation rates)

Bulgaria

Austria

U.S.

Slovenia

Serbia

Italy

Croatia

Greece

Germany

France

World prices of the basic products

Generally, downward revision of the world stock exchange prices for 2013 and 2014, relative to the January projection

Decrease in the crude oil prices in 2013 and 2014, compared to the increase in 2012

Lower metal prices, downward adjustment in 2013 and slight rise in 2014

No pressures of the world food price as previously anticipated

annual changes, %

Exchange rate

USD/ EURCrude oil Crude oil Export metal

price index Nickel price Copper price Wheat price Corn price

(increase = appreciation

of EUR)

(USD per barrel)

(EUR per barrel)

(EUR based, 2005=100)

(USD per metric tonne)

(USD per metric tonne)

(EUR per metric tonne)

(EUR per metric tonne)

Forecast April 2013 2011 4.9 39.3 32.7 15.3 5.0 17.0 34.9 49.62012 -7.6 0.9 9.3 -6.1 -23.4 -9.8 7.5 11.02013 1.9 -2.4 -4.3 -3.0 -3.9 -3.9 -3.3 -12.02014 -1.7 -5.6 -4.0 1.5 0.3 0.0 3.3 -14.5

Forecast January 2013 2012 -7.5 0.9 9.1 -6.1 -23.4 -9.8 7.4 11.22013 -1.2 -5.7 -4.6 0.3 -0.6 -1.4 9.6 -3.32014 -1.1 -4.4 -3.4 1.7 1.3 0.4 2.3 -7.3

Macroeconomic projections for 2013-2014GDP

Almost unchanged foreign demand, as well as almost unchanged perceptions for the labor market, foreign direct investments and credit activity relative to the previous projection

The estimations for the economic growth in 2013 and 2014 unchanged compared to the previous projection

Moderate recovery of the economy in 2013 and growth acceleration in 2014, given expectations for positive effects of the structural changes on the exports and moderate increase in the domestic demand

Closure of the negative output gap in the second half of 2014

2.8 3.0

0.0

2.23.02.8 3.0

-0.3

2.23.0

-3.0-2.0-1.00.01.02.03.04.05.0

2010 2011 2012 2013 2014

GDP(annual growth rates, in %)

January 2013 April 2013

-4

-3

-2

-1

0

1

2

2010 2011 2012 2013 2014

Output gap(in %)

January 2013 April 2013

Macroeconomic projections for 2013 -2014 GDP components

After the decrease in 2012, moderate recovery of the exports in 2013 and its further intensification in 2014 is expected, in environment of expectations for recovery of the foreign demand in 2014 and positive effect of the activity of the new facilities

Moderate increase in the import pressures in 2013 and 2014, stimulated by both the export and domestic demand

Increase in the domestic demand in 2013, expecting its intensification in 2014, mostly due to the announced foreign direct and public investments and favorable movements on the labor market

Annual growth rates (in %, seasonally adjusted data)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -4.6 0.6 0.4 -16.0 -14.1 -2.9 -10.82010 2.8 1.4 -2.0 -4.6 23.2 8.9 -0.3 -14.62011 3.0 4.0 0.6 13.5 11.8 13.8 5.4 18.42012 -0.3 -1.2 1.3 11.8 -0.4 3.5 1.9 12.42013 2.2 1.5 1.3 6.4 4.0 3.9 2.6 3.82014 3.0 3.6 0.6 8.3 9.5 9.4 4.3 9.2

Contributions to annual growth (in p.p.)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -3.8 0.1 0.1 -6.9 9.5 -3.6 2.62010 2.8 1.1 -0.4 -1.1 8.4 -5.2 -0.4 3.22011 3.0 3.1 0.1 3.1 5.1 -8.5 6.4 -3.42012 -0.3 -0.9 0.2 3.0 -0.2 -2.4 2.3 -2.62013 2.2 1.1 0.2 1.8 1.9 -2.8 3.2 -0.92014 3.0 2.8 0.1 2.5 4.6 -6.8 5.4 -2.2

Macroeconomic projections for 2013 -2014 balance of payments’ current account

Slight deepening of the current account deficit in 2013 and more evident deepening in 2014

Decrease in the trade deficit in 2013, and its widening in 2014, given more evident import pressures by the investment demand

Private transfers stabilization and fall in their share in GDP

% of GDP 2009 2010 2011 2012 2013 2014

Current account balance -6.8 -2.0 -3.0 -3.9 -4.2 -6.0

of which:

Trade balance -23.3 -20.5 -22.4 -23.7 -23.3 -24.6

Current transfers, net 16.9 19.4 19.7 21.5 20.6 20.3

Macroeconomic projections for 2013 -2014 capital inflows

Expectations for gradual increase in the foreign direct investments in 2013 and 2014

Similar level of net capital flows in 2013 and their increase in 2014, retaining the dominant share of the foreign direct investments and external borrowing of the Government in their structure

In 2013 and 2014, increase in the foreign reserves is expected, and their maintenance near the adequate level

2.2

4.5

1.5

3.0

4.5

0.0

1.0

2.0

3.0

4.0

5.0

0

100

200

300

400

2010 2011 2012 2013 2014

Foreign direct investment

millions of EUR as % of GDP (right scale)

4.76.96.2

2.0

6.8

4.8 4.4

7.3

0.01.02.03.04.05.06.07.08.0

2009 2010 2011 2012 2013 2014

Net-capital flows (in % оf GDP)

January 2013 April 2013

Macroeconomic projections for 2013 -2014 inflation

Downward revision of the projected inflation for 2013 (from 3.2% to 2.8%) and assessment for its stabilization in 2014 (2.3%)

Absence of demand pressures given negative production gap until the second half of 2014

The world oil and food prices move downwards during the current and the following year

Anticipated increase in the regulated prices in the domestic economy in 2013

-4-3-2-10123456

2010 2011 2012 2013 2014

Output gap and inflation(in %)

Output gap Inflation

Macroeconomic projections for 2013 -2014 credit growth

Expectations for moderate credit growth acceleration similar to the January projection, given further increase in the deposits and available foreign sources of funding

However, the uncertain global ambient, the banks risk perceptions and the business strategies of the European banking groups also present on the domestic market, can reflect on the credit policy of the domestic banking sector through higher prudence

The banking system continue registering high capital adequacy ratio (17.1% at the end of 2012), high liquidity and moderate increase in the nonperforming placements of the nonfinancial entities (11.9% at the end of February 2013 )

3.04.05.06.07.08.09.0

10.011.012.0

2010 2011 2012 2013 2014

Total loans(annual growth rates, %)

January 2012 April 2013

Comparison with the previous projection

Estimations for the economic growth unchanged relative to the previous projection – GDP growth of 2.2% for 2013 and growth acceleration to 3% for 2014 - almost unchanged perceptions for foreign demand, foreign investments, labor market and credit support- both the export and the investment activity – remain to be the main factors for the economic growth - these two factors in 2014 accompanied with the strengthened positive contribution of the private consumption

Downward revision of the projected inflation from 3.2% to 2.8% for 2013 and maintenance of the January projection of 2.3% for 2014

- lower initial conditions- poorer inflationary pressures from the import food and energy prices - further absence of domestic demand pressures

External position- higher current account deficit in 2013 (given higher realization

for 2012), when smaller anticipated surplus with the services and higher deficit with the income, as well as slight downward revision with the capital flows were expected (mainly because of the short-term capital flows)- deeper current account deficit for 2014, but also higher capital inflows- increase in the foreign reserves

Summary

Moderate increase in the economic activity during this and the following year, triggered by the higher investment activity and the anticipated recovery of the exports, additionally supported in 2014 by the higher positive effect of the private consumption

Downward revision of the projected inflation for 2013 and maintenance of the January expectations for deceleration of the inflationary pressures in 2014

Moderate widening of the current account deficit in 2014, partly driven by the increase in the import of investments

The capital inflows in 2013 and 2014, sufficient for covering the current account deficit and additional accumulation of the foreign reserves

Sensitivity to the scenario of possible changes in the global economic environment