Bulgaria sustained its sound macroeconomic fundamentals in 2007, the only under-performing parameters being inflation and the current account deficit, Bulgarian National Bank (BNB) said in its latest Economic Outlook, a report that BNB releases on a quarterly basis.
The central bank expects little change to overall macroeconomic performance in the first half of the year.
Economic growth remained on its swift growth streak at 6.2 per cent despite the fact that seasonal factors led to a 44.1 per cent year-on-year decrease of agricultural output in the third quarter of the year, BNB observed. Foreign direct investments (FDI) – at 6.1 billion euro and 21.1 per cent of 2007 gross domestic product (GDP) – covered the current account deficit for the year by 104.8 per cent.
Meanwhile, gross capital formation, which is the parameter measuring corporate and public investments into equipment and value-added production, soared by 21.7 per cent in 2007, a solid increase from 14.7 per cent the year before.
This performance indicates that the economy emerged relatively unscathed from the global financial crisis this year, according to BNB.
No brakes to foreign borrowing
Nor is the turmoil fraught with frustrating local corporate and financial entities’ foreign borrowing activity in the first half of the year. The “tightening” of the financial purse translated into higher liquidity and loan premiums but not in smaller lending volumes, the central bank explained.
Hence, borrowing dynamics in the first half of 2008 is expected to be on par with last year’s. In 2007 the value of corporate entities’ foreign loans totalled 2.7 billion euro.
The private sector’s intensive borrowing from foreign lenders geared the increase of external debt to 27 billion euro, an annual increase of 6.9 billion euro. The value of the private sector’s foreign loans reached 7.39 billion euro as of the end of 2007, more than half of which (3.19 billion euro) was in internal company loans.
The reverse dynamics held true for public debt, which decreased by 455.6 million euro and stood at 15 per cent of GDP as of the end of 2007 after loan payments to the World Bank and the International Monetary Fund.
At the same time, Bulgarian National Bank does not expect solid increases in interest rates on loans in the first half of the year. It based its projections on European Central Bank statements that it would refrain from raising base interest rates any time soon, as on the fierce competition on the local banking market.
Although lending activity will remain high in the first half of the year, credit growth is set to decelerate from 62 per cent in 2007 to 50 per cent in 2008, BNB predicts.
Business environment and inflation observations
The business environment is to remain favourable in the first half of the year and is to help sustain economic growth at 2007 levels, according to Bulgarian National Bank. Furthermore, the first half of the year is expected to re-affirm a trend that emerged in 2007, namely that the share of investments in assets contributing to generating value-added to GDP would remain higher than that of consumption.
Consumer sentiment regained ground in the first quarter of the year after a sharp downslide in the latter months of 2007 when inflation picked up dramatically.
The national budget, BNB observed, ran a surplus of 2.12 billion leva, comprising 3.8 per cent of GDP. Despite that, the government overshot the spending target by one billion leva.
The central bank expects year-on-year inflation to remain high in January-June 2008 because of the low benchmarks last year and to decelerate in the latter part of the year. High growth in the first half of the year will mainly be attributed to the increase of prices of foodstuffs and fuels, just like in 2007, and by the expected hike of excise duties.
Sectoral performance
The top performing sectors last year were industry and services and they are sustaining their busy development streak in 2008, the BNB report reads. Last year, private spending on long-term assets rose by 42 per cent on the year in 2007.
The services market rose by 7.5 per cent year-on-year and contributed 4.5 percentage points to the increase of national gross value-added. The financial mediation sector, meanwhile, reported the highest sectoral growth, by 34.3 per cent this year.
Macroeconomic-wise, BNB expects export growth in nominal terms to retain its end-2007 levels. While the central bank does not rule out the possibility that external demand might be hampered over the deterioration of external financial markets, it remained upbeat that Bulgaria’s main trading partners would hardly shun Bulgarian imports.
At the same time, the dynamics of imports is expected to remain on par with end-2007 levels mainly due to capital goods imports and imports of raw materials and physical goods.
