Another year of strong GDP growth lies ahead for Bulgaria, says Unicredit Group New Europe Research Network.

On July 9, Unicredit Bulbank, Bulgaria’s largest banking group and a part of Italy’s UniCredit, published the group’s latest quarterly report on the country.

Accelerating investments, improving job creation, falling public sector debt and rising central bank reserves are part of the “still favourable baseline scenario for Bulgaria, despite some elevation of downside risks”.

Domestic demand pressure on imports and one-off industry specific factors curbing exports will cause the current account to deteriorate even further, Unicredit experts say. Unicredit sees as potential threats the possibility of the European Union resorting to financial sanctions on the country for its insufficient progress in fighting corruption and organised crime.

“It threatens to negatively affect sentiments of international investors and to constrain potential benefits from EU membership.”

To compensate for the sluggish restructuring of the real economy and to counter the risk associated with the rising current account gap, the Government will shoot for an even higher budget surplus, which will be easy to reach given the record fiscal revenue over performance in the current year, the report says.

“In Q1, GDP growth surprised on the upside, going up by 6.2 per cent year-on-year on the back of buoyant investment activity and still high consumption spree.”
On the demand side, growth remains far from balanced, with the gap between positive contribution of domestic demand and negative contribution of net exports expanding even further.

Consumption spending and particularly investments drew support from the record increase in loans extended by the local banking sector at the beginning of the year.

“We remain optimistic as to GDP growth prospects for the rest of the year. We expect consumption appetite in the household sector to remain robust. There are a number of indications that investments will reach their peak in the first year of EU membership, after losing some momentum in the first nine months of the previous year.”

Record high revenue over-performance is increasing the Government’s comfort on the fiscal side.

Fast economic expansion in combination with very conservative fiscal revenue planning, in order to counter risks from changes in VAT collection, are on track to produce a record high surplus on public finances in 2007.

“We think that the implementation of the measures drafted by the Government brings no risks for the macroeconomic stability.”

Such measures include a pension increase in the next two years, an already budgeted 10 per cent increase in salaries in the public sector, reduction of the social insurance contribution rate by three per cent and tax cuts for the lowest income population. Contrary to the Government’s official position, the report says that a further 10 per cent increase of salaries is possible, if financed at the expense of staff redundancies and cutbacks. 

“Unfortunately, the Government will miss the chance to create more stimuli for strengthening the supply side of the economy, by cutting taxation on labour more aggressively. Instead, the Government’s involvement in the reallocation of resources in the economy will increase even further, increasing the gap with the frontrunner countries in real convergence. Also on the negative side, a fiscal bonanza is likely to erode even further the already waning political will to press ahead with the restructuring of the ailing health care and education sectors. If left unreformed, these sectors will continue to be a source of long-term risks for fiscal sustainability and a major cause of public frustration,” the report says.