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Two years of global crisis: the Bulgarian economy in 2009
submited on 23.08.2009 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
• The onset of the financial crisis in 2007 coincided with a period of rapid economic growth in Bulgaria, driven primarily by investment activity. It is difficult to differentiate how much exactly the dynamics of the Bulgarian economy has been a a result of fundamental factors, related to increasing productivity and the improvement of the business environment, and how much – as a consequence only of the fast credit expansion. There are at least a few indications that Bulgaria faces the crisis in a much more stable position than most of the European economies (and the US), while the factors of growth have not been only due to the access to “easy money”.
• The government conducted in the last 10 years a policy of budget surpluses, and practically the Bulgarian government does not have any debt, which is not the case of the many developing economies in the region, leading loose budget policy. The currency board regime did not allow the BNB to stimulate and ease credit, supporting the creation of credit “bubbles” (even in the recent years the central bank introduced many restrictions), while the starting level of indebtedness was extremely low.
• For the relatively poor in capital Bulgarian economy the net inflow of external savings is directly related to growth. The contraction of money supply worldwide led to considerable deceleration of the inflow of foreign capital in the country. Foreign direct investment declined to 17% of GDP in mid-2009 being 29% as of end-2007. There is also a sharp contraction of the access to external loans. The new loans to the real sector started shrinking as early as end-2007, while commercial banks continued to attract new financial resource until the second quarter of 2008.
• After the first effects of the crisis on the global economy the structure of the Bulgarian exports started slightly shifting – the share of some consumer goods expanded at the expense of raw materials, which are used for intermediate consumption in the production process.
• The loss of jobs was concentrated in a few sectors of the economy. Over 60%, or above 56,000, of the destructed working places were in the processing industry. The remaining were in construction and trade. The cuts in employment were almost 100% in the private sector. Adequate public policy would include considerable reduction of the employment in the public sector.
• The main challenge before the local economy is the maintaining of balance of public finances in a state of shrinking public revenues in the context of the strong dependence of the budget on indirect taxes.
• One advantage of the Bulgarian economy is the low level of public debt and the low household indebtedness. Meanwhile the internal potential for increasing productivity is not fully utilized. The risks of bank assets’ quality deterioration could be neutralized by the relatively high levels of capital adequacy of banks and, if necessary, by the built fiscal buffers.
submited on 23.08.2009 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
• The onset of the financial crisis in 2007 coincided with a period of rapid economic growth in Bulgaria, driven primarily by investment activity. It is difficult to differentiate how much exactly the dynamics of the Bulgarian economy has been a a result of fundamental factors, related to increasing productivity and the improvement of the business environment, and how much – as a consequence only of the fast credit expansion. There are at least a few indications that Bulgaria faces the crisis in a much more stable position than most of the European economies (and the US), while the factors of growth have not been only due to the access to “easy money”.
• The government conducted in the last 10 years a policy of budget surpluses, and practically the Bulgarian government does not have any debt, which is not the case of the many developing economies in the region, leading loose budget policy. The currency board regime did not allow the BNB to stimulate and ease credit, supporting the creation of credit “bubbles” (even in the recent years the central bank introduced many restrictions), while the starting level of indebtedness was extremely low.
• For the relatively poor in capital Bulgarian economy the net inflow of external savings is directly related to growth. The contraction of money supply worldwide led to considerable deceleration of the inflow of foreign capital in the country. Foreign direct investment declined to 17% of GDP in mid-2009 being 29% as of end-2007. There is also a sharp contraction of the access to external loans. The new loans to the real sector started shrinking as early as end-2007, while commercial banks continued to attract new financial resource until the second quarter of 2008.
• After the first effects of the crisis on the global economy the structure of the Bulgarian exports started slightly shifting – the share of some consumer goods expanded at the expense of raw materials, which are used for intermediate consumption in the production process.
• The loss of jobs was concentrated in a few sectors of the economy. Over 60%, or above 56,000, of the destructed working places were in the processing industry. The remaining were in construction and trade. The cuts in employment were almost 100% in the private sector. Adequate public policy would include considerable reduction of the employment in the public sector.
• The main challenge before the local economy is the maintaining of balance of public finances in a state of shrinking public revenues in the context of the strong dependence of the budget on indirect taxes.
• One advantage of the Bulgarian economy is the low level of public debt and the low household indebtedness. Meanwhile the internal potential for increasing productivity is not fully utilized. The risks of bank assets’ quality deterioration could be neutralized by the relatively high levels of capital adequacy of banks and, if necessary, by the built fiscal buffers.
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