Past a year of strike turbulence that highlighted the urgent need for reform of the health care and education sectors, few analysts are pessimistic about the general health of the Bulgarian economy.

Optimism permeates forecasts for the Bulgarian economy in 2008 by both local and foreign governmental authorities and think-tanks. The background to the upbeat projections is that Bulgaria’s economy has generated sufficient momentum to make it easy to predict macro-economic parameters for the rest of this year.

Economists maintain that the economy’s fiscal and monetary systems are under no immediate threat, given that the country remains under the oversight of International Monetary Fund (IMF). The assurance lent by this means that no political party has called for this to change. Then there is the overriding consensus that Bulgaria should aspire for euro adoption as soon as possible. The entire political spectrum has united around a tentative eurozone accession deadline of 2012.

Hence, the need to stick to the Maastricht criteria as tightly as possible.

At present, Bulgaria has been complying with four of the five Maastricht criteria, with the fifth – inflation of three per cent annually – eluding the country. This and the current account (CA) deficit are the only significant woes of the Bulgarian economy, most analysts say.

The latter, however, is also not perceived as worrisome because the widening of the CA deficit has largely been attributed to factors external to – and in general positive for – the Bulgarian economy. Namely, growth in the volume of foreign direct investments in the country (indicative of foreigners’ perceptions of the local investment climate); the waiver of duties for European Union imports since the turn of the year 2007 (to align with the common European community market principles) and the resulting spurt in inflow of EU commodities, among others.

While the gap is expected to remain high – at least until Bulgarian business conforms to all regulations that allow it to export in the EU with no restrictions whatsoever, the remainder of the macro-economic parameters are expected to be in check.

And the forecasts are
While the Government as a whole is by no means the only voice offering a positive outlook, the Ministry of Finance is the most positive of all. Below are projections for the main macro-economic parameters of the government, the European Commission (EC), UniCredit Group and local economic think-tank Industry Watch.

According to the 2008 Budget Bill, the Finance Ministry expects gross domestic product (GDP) to grow on a par with the years before (6.4 per cent). The pace of economic growth in 2009 and 2010, respectively, is expected to be 6.8 per cent and 6.9 per cent.

The EC is no less upbeat, seeing gross national output at 6.2 per cent. UniCredit Group, when the bank issued its forecast in early autumn 2007, was a bit less conservative, seeing growth at 6.0 per cent. Industry Watch puts its GDP growth forecast at 5.7 per cent.

Inflation, which last year went into the double digits over the one-off spurt of power and food prices, is foreseen by the Government to halve year-on-year to 4.5 per cent in 2008. The EC expects inflation at 4.3 per cent. UniCredit Group hopes inflation to grow by 4.5 per cent, while Industry Watch anticipates an inflation rate at 4.5 per cent.

The Government is holding to its Maastricht pledge for a budget surplus of three per cent of GDP, on a par with the year before. The EC expects a public budget surplus at two per cent, UniCredit Group at 1.5 per cent and Industry Watch at 1.6 per cent of GDP.

In line with the these observations, the CA gap is seen at the highs of 2007. The Cabinet sees the gap at 21.9 per cent in 2008. The EC puts it at minus 17.2 per cent, UniCredit Group at minus 12.5 per cent. Industry Watch has provided no figures to this end.
 
The sectors to excel
The finance and real estate sectors are seen to again lead the way this year, experts agreed at a number of forums last year. The latest confirmation came during the Economist roundtable in early December.

Even though Bulgarian National Bank (BNB) has enforced restrictions to stem loan growth, loans – especially in the corporate credit segment – are still to be in strong demand.

Corporate loan exposure is said to increase the fastest with the factors to trigger growth being economic dynamics and the accelerated investment activity. The trend is also likely to gain momentum as Bulgarian business begins absorbing EU funds.

It is said to run concurrent to the increase in bank deposits’ exposure. A number of banks have geared up the range and interest rates of deposits.

The non-banking segment is also set to gain speed now that Bulgarians are experiencing a swift increase in the volume of salaries. These excess funds are said to be redirected to collective investment schemes geared to retail investors as well as the more active search for alternative savings products with higher returns.

Expectations are that the securities market will also be thriving now that the country enjoys stable economic growth, a more liberal regime of the pension industry, the growing significance of mutual funds and the capital inflow from abroad, according to Industry Watch. The bourse is said to continue enjoying a spurt of initial public offerings (IPOs).

The real estate sector will be pulled by luxury developments segment and office developments.

Attractive mortgage loan offers, on the other hand, are said to keep the real estate market vibrant, where demand will pull the average prices of the real estate market in the 15 to 22 per cent range, according to Era Bulgaria. Expectations are that the dwellings in highest demand will be two-room flats in new buildings, as well as three-room flats in existing brick or prefabricated buildings.

The construction sector is also set to thrive this year amid the expected inflow of funds from the EU structural funds. The industry will continue its upward trend due to the increase of raw materials’ prices and due to the increase in internal and external demand.
Tourism is also a sector to watch with ample growth reserves.

Trends to watch
A trend to watch, according to Postbank officials, will be the rise of public-private partnerships between banks and municipalities as a lever of development at a local level. The trend will be fuelled by the need to finance a number of basic infrastructure projects and PPPs are a relevant business model to follow.

According to Postbank, municipalities will rely on relations with business to spearhead improvements in public infrastructure.

Positive sentiment about the Bulgarian economy is indicative from forecasts by the Labour and Social Policy Ministry and individual think-tanks. Forecasts are that employment will increase by 150 000 both because of the decrease in corporate and personal income tax rate to 10 per cent and the resulting bringing of illegal unemployment “into the light”.

Analysts believe the pace of employment will increase by 4.6 per cent, slower than last year but still sustaining unemployment below seven per cent. Expectations are that the level of employment is to increase even on further cut to the social security burden.