- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
The Bulgarian economy in 2008
submited on 29.12.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 29.12.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Overall economic dynamics
Economic growth in the following year will be probably around 6.3% annually according to the Industry Watch regular poll among leading Bulgarian macroeconomists, which is organized twice a year.
Although we expect faster consumer prices inflation (than the one forecasted in the spring), we do not see risk before monetary or fiscal stability in the country. It is important to make a notice that none of the leading political parties has declared intention of abolishing the currency board.
We expect the current account deficit to be growing in line with the increase of capital inflow into the country. Total investments – local and foreign – are expected too grow in the range of 15-22% annually.
Fiscal frame
The flat tax rate is the big innovation for 2008 in the area of public finance. However, the effect for the budget will probably repeat what happened after the corporate tax rate cut to 10% - considerable revenue growth. We expect this to be an important step toward “legalizing” employment and therefore – the tax base. This raises again the question about further social insurance contributions’ cuts, as we must take into account the almost certain growth in revenue accumulation in 2008 as well.
We do not expect municipalities to be “brave” in their decisions regarding local tax setting despite the certain independence, they have been given. The reason is to a large extent political considering the parliament elections in 2009, for which no party would risk support, raising the most common tax.
On a macro level in 2008 as well we expect budget surplus of more than 3%. The accumulation of reserve will continue, as the government will keep its restrictive fiscal policy from a real sector perspective.
Labor market
According to our preliminary estimates the total employment in 2007 has been 3.25 million people. We expect that in 2008 the total employment in Bulgaria to reach 3.4 million people – these are some 150 thousand new working positions. In the private sector only the growth of working places is traditionally faster than the average for the economy (the private sector at the moment generates more than 90% of the employment in the non-farm business sector). We forecast employment growth of 4.6% - slightly slower than last year’s, which could be accelerated if the social insurance burden is being reduced.
We expect the rapid growth of wages in the most common labor market segments to continue. The most common positions are the “medium” – requiring a certain skill-set, but no specialized knowledge. The medium and basic (low qualified) positions constitute together some 70% of existing employment in Bulgaria. In the past year we saw average wage growth in these most common segments of around 20%. For now there has not been any reason to expect deceleration of this wage growth rate in the next year.
Sofia will continue to offer most expensive labor, but as we saw last year, differences with Varna and Burgas are already not that significant. Plovdiv will remain among biggest cities with relatively cheap labor.
Consumer prices
In 2007 higher food prices were registered following global inflationary reasons. We do not expect the agriculture commodities’ price growth to repeat, thus there is no reason to forecast higher inflation in this line of thoughts. Considering non-tradable goods and services the traditionally faster price growth (relative to other EU countries), due to the more rapid growth of material productivity and price of labor. With regard to regulated prices several scenarios are possible, but probably the government will attempt to pursue gradual price growth, in order to comply with EU membership criteria. The annual average inflation (as reported by the NSI via CPI) will be between 7.5 and 8% for 2007. Inflation twice slower in 2008 is possible, however in our opinion it is realistic to expect inflation in the range of 4-6% in the next year.
Asset prices
Asset prices will continue to grow faster than prices of consumer goods. From this standpoint, investment in assets in general will generate real income. The US housing crisis effects and the following deterioration of credit markets however will begin to make certain impact. We expect the interest of foreigners toward given real estate segments to decline. Some portfolio investors will probably also reduce their interest toward emerging markets, and this will decrease demand for Bulgarian securities.
Nevertheless, fundamentals point toward bullish markets. Nominal interest in Bulgaria could decline even more (under stable interest rates in the Euro area) due not only to gradually declining systematic risk for our economy, but also to continuing innovations and efficiency improvement in the local financial sector. Solvent internal housing demand will also be growing at fast pace.
Financial intermediation
In 2008 the finance industry will continue to be one of the most dynamic sectors of the economy. It could be suggested that sticking to course of restrictive monetary policy from the side of BNB, together with the more expensive financial resource due to both internal and external factors, will lead to certain deceleration of credit expansion. Annual growth of credit to the private non-financial sector will probably vary in the range of 35-40%. Our forecast is for more moderate expansion in the retail segment, as compared to previous years. When shaping expectations of medium-term developments in the credit market, we take into account few conditions. First, in the household segment there is an indebtedness accumulation effect – especially after the end of the period with lighter credit servicing terms (very popular in banks’ promotional campaigns) even larger portion of household income will begin to be reallocated toward servicing the debt, putting thus restraints on opportunities for taking on additional credit. We will probably observe certain reallocation of demand for credit toward sources outside the banking system, although this credit will remain rather complementary, than substituting the bank loan.
We expect high corporate credit growth due to maintaining high demand in this segment. This demand will be supported mainly by economic dynamics and accelerated investment activity. Additional impact could be expected by requirements for providing co-financing to projects, financed by the European structural funds.
The acceleration of the integration of the Bulgarian banking sector into the European financial system will probably result in speeding up the process of interest convergence, i.e. the dependence of the banking system on global monetary trends will tend to increase.
Keeping rapid expansion in the non-bank segment is expected in 2008. Our forecast is for a considerable growth of individual holdings in collective investment schemes due not only to increasing investment opportunities for small investors, but also to more active demand for alternative savings products, providing higher return.
The fast expansion of the private pension industry will probably be kept in the following year – under the influence of the improving labor market fundamentals, further shadow economy reduction and the expansion of the base, upon which pension insurance contributions in the second pillar are calculated (attributable to the increase of the minimal and maximal insurance thresholds). Major challenges before pension funds are related to improving portfolio management efficiency and strengthening competitive positions relative to other investment alternatives.
We expect keeping relatively high demand for securities due to the impact of favorable fundamental factors – stable economic growth, more liberal investment regime for the pension industry, growing importance of mutual funds, foreign capital inflow. In 2008 we will probably continue to observe not only increasing number of initial public offerings, but also more active use of the stock exchange as a channel for attracting financial resource via capital raising. The choice of stock exchange platform (and thus the choice of a strategic partner as well) is one of the prerequisites for improving liquidity and accelerating the development of the Bulgarian capital market in general.
Economic growth in the following year will be probably around 6.3% annually according to the Industry Watch regular poll among leading Bulgarian macroeconomists, which is organized twice a year.
Although we expect faster consumer prices inflation (than the one forecasted in the spring), we do not see risk before monetary or fiscal stability in the country. It is important to make a notice that none of the leading political parties has declared intention of abolishing the currency board.
We expect the current account deficit to be growing in line with the increase of capital inflow into the country. Total investments – local and foreign – are expected too grow in the range of 15-22% annually.
Fiscal frame
The flat tax rate is the big innovation for 2008 in the area of public finance. However, the effect for the budget will probably repeat what happened after the corporate tax rate cut to 10% - considerable revenue growth. We expect this to be an important step toward “legalizing” employment and therefore – the tax base. This raises again the question about further social insurance contributions’ cuts, as we must take into account the almost certain growth in revenue accumulation in 2008 as well.
We do not expect municipalities to be “brave” in their decisions regarding local tax setting despite the certain independence, they have been given. The reason is to a large extent political considering the parliament elections in 2009, for which no party would risk support, raising the most common tax.
On a macro level in 2008 as well we expect budget surplus of more than 3%. The accumulation of reserve will continue, as the government will keep its restrictive fiscal policy from a real sector perspective.
Labor market
According to our preliminary estimates the total employment in 2007 has been 3.25 million people. We expect that in 2008 the total employment in Bulgaria to reach 3.4 million people – these are some 150 thousand new working positions. In the private sector only the growth of working places is traditionally faster than the average for the economy (the private sector at the moment generates more than 90% of the employment in the non-farm business sector). We forecast employment growth of 4.6% - slightly slower than last year’s, which could be accelerated if the social insurance burden is being reduced.
We expect the rapid growth of wages in the most common labor market segments to continue. The most common positions are the “medium” – requiring a certain skill-set, but no specialized knowledge. The medium and basic (low qualified) positions constitute together some 70% of existing employment in Bulgaria. In the past year we saw average wage growth in these most common segments of around 20%. For now there has not been any reason to expect deceleration of this wage growth rate in the next year.
Sofia will continue to offer most expensive labor, but as we saw last year, differences with Varna and Burgas are already not that significant. Plovdiv will remain among biggest cities with relatively cheap labor.
Consumer prices
In 2007 higher food prices were registered following global inflationary reasons. We do not expect the agriculture commodities’ price growth to repeat, thus there is no reason to forecast higher inflation in this line of thoughts. Considering non-tradable goods and services the traditionally faster price growth (relative to other EU countries), due to the more rapid growth of material productivity and price of labor. With regard to regulated prices several scenarios are possible, but probably the government will attempt to pursue gradual price growth, in order to comply with EU membership criteria. The annual average inflation (as reported by the NSI via CPI) will be between 7.5 and 8% for 2007. Inflation twice slower in 2008 is possible, however in our opinion it is realistic to expect inflation in the range of 4-6% in the next year.
Asset prices
Asset prices will continue to grow faster than prices of consumer goods. From this standpoint, investment in assets in general will generate real income. The US housing crisis effects and the following deterioration of credit markets however will begin to make certain impact. We expect the interest of foreigners toward given real estate segments to decline. Some portfolio investors will probably also reduce their interest toward emerging markets, and this will decrease demand for Bulgarian securities.
Nevertheless, fundamentals point toward bullish markets. Nominal interest in Bulgaria could decline even more (under stable interest rates in the Euro area) due not only to gradually declining systematic risk for our economy, but also to continuing innovations and efficiency improvement in the local financial sector. Solvent internal housing demand will also be growing at fast pace.
Financial intermediation
In 2008 the finance industry will continue to be one of the most dynamic sectors of the economy. It could be suggested that sticking to course of restrictive monetary policy from the side of BNB, together with the more expensive financial resource due to both internal and external factors, will lead to certain deceleration of credit expansion. Annual growth of credit to the private non-financial sector will probably vary in the range of 35-40%. Our forecast is for more moderate expansion in the retail segment, as compared to previous years. When shaping expectations of medium-term developments in the credit market, we take into account few conditions. First, in the household segment there is an indebtedness accumulation effect – especially after the end of the period with lighter credit servicing terms (very popular in banks’ promotional campaigns) even larger portion of household income will begin to be reallocated toward servicing the debt, putting thus restraints on opportunities for taking on additional credit. We will probably observe certain reallocation of demand for credit toward sources outside the banking system, although this credit will remain rather complementary, than substituting the bank loan.
We expect high corporate credit growth due to maintaining high demand in this segment. This demand will be supported mainly by economic dynamics and accelerated investment activity. Additional impact could be expected by requirements for providing co-financing to projects, financed by the European structural funds.
The acceleration of the integration of the Bulgarian banking sector into the European financial system will probably result in speeding up the process of interest convergence, i.e. the dependence of the banking system on global monetary trends will tend to increase.
Keeping rapid expansion in the non-bank segment is expected in 2008. Our forecast is for a considerable growth of individual holdings in collective investment schemes due not only to increasing investment opportunities for small investors, but also to more active demand for alternative savings products, providing higher return.
The fast expansion of the private pension industry will probably be kept in the following year – under the influence of the improving labor market fundamentals, further shadow economy reduction and the expansion of the base, upon which pension insurance contributions in the second pillar are calculated (attributable to the increase of the minimal and maximal insurance thresholds). Major challenges before pension funds are related to improving portfolio management efficiency and strengthening competitive positions relative to other investment alternatives.
We expect keeping relatively high demand for securities due to the impact of favorable fundamental factors – stable economic growth, more liberal investment regime for the pension industry, growing importance of mutual funds, foreign capital inflow. In 2008 we will probably continue to observe not only increasing number of initial public offerings, but also more active use of the stock exchange as a channel for attracting financial resource via capital raising. The choice of stock exchange platform (and thus the choice of a strategic partner as well) is one of the prerequisites for improving liquidity and accelerating the development of the Bulgarian capital market in general.
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