- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
submited on 04.06.2011 in category Regulated markets | Fiscal affairs | Privatisation | Political stability | Monetary policy
The European Union is the main trade partner of Bulgaria so the Bulgarian economy follows in the footsteps of the EU market recovery. At the end of 2010 the GDP of Bulgaria started recovering gradually but it was only export-driven. At present it is of utmost importance whether Europe is steadily leaving the crisis behind or a relapse is on the way, that is, the so-called double-dip recession for the EU as well as for the USA.
The investments and the private sector lending are still ailing in Europe. Given this circumstance we should also consider that the EU governments added to the state debt more than 2 trillion euros by direct bank subsidies and financial bail-outs. The withdrawal of the financial stimulus might drag the European economy back into recession, whence Bulgarian exports could become less demanded.
In a scenario of debt crisis resumption there will be new repercussions in the financial sector. If that happens, the foreign individual and institutional investors’ appetite for investments in Eastern Europe will fall.
In Bulgaria the decreased budget deficit indicates possible stabilization of the fiscal policy and reduction in the political risk as well as in the risk for the monetary regime. Yet it is to bear in mind that the government is too dependent on the inflationary dynamics (which is out of its control) to put enough revenue in the coffers. Till now the government has been cutting capital costs, but it might not suffice for a balanced budget. The upcoming elections will exert pressure for more spending. This is why we don’t rule out the possibility for a budget deficit worsening yet, whence a sharp decline in fiscal reserves might follow.
The main rationale for the fall in investments in Bulgaria is the inert foreign capital inflow. The foreign direct investments have plummeted from 9 billion euros in 2007 to 1.6 billion euros during the 12-month run-up to March 2011. The net flow of foreign direct investments is still positive, but the banks are paying off their net liabilities because of the weak domestic demand for loanable funds. The plunge in the foreign investments accounts for the small increase in the economic activity by 0-1% yearly despite the spurt in the export-oriented industries.