2012-11-14 22:22:57 - Bulgaria Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
We expect Bulgaria´s economic growth to be weighed down by significantly weaker aggregate demand in the eurozone and persistent concern about the eurozone debt crisis. We believe that the slowdown in external demand will weigh on Bulgarian exports, which, when combined with only moderate growth in household spending, will feed through to lower real GDP growth in 2012. Politically, we expect 2012 to be a difficult year for the ruling Citizens for the European Development of Bulgaria party.
A combination of high public dissatisfaction with the government´s seeming lack of progress in the fight against corruption and failure to gain entry to the Schengen visa-free travel zone, combined with a weaker economic growth outlook will likely pose challenges to the government.
That said, with the opposition disorganised and weak, we do not expect the government to lose its mandate in 2012.
We forecast the fiscal deficit narrowing to 1.5% of GDP in 2012, from 2.1% of GDP in 2011 as we expect Bulgaria´s government to continue its fiscally prudent consolidation efforts. However, while the government will restrain spending, the slowdown in economic growth will make further revenue increases harder to come by. There remains the risk of an expansion of government spending in the event that growth should slow more precipitously than we currently forecast.
Major Forecast Changes
Significantly weaker external demand for Bulgaria´s exports and a domestic banking sector highly exposed to the eurozone sovereign debt crisis will continue to weigh on the country´s economic outlook in the coming years. We have revised down our Bulgarian real GDP growth forecast for 2012 and 2013 to -0.1% and 1.6%, from previous forecasts of 1.1% and 2.3% respectively.
The Bulgarian government will struggle to meet its 2012 budget deficit target of 1.3% of GDP, and we instead forecast a deficit of 1.5%. That said, the government´s commitment to fiscal prudence is set to remain in place over the coming years and we believe investor sentiment towards Bulgaria´s sovereign debt is likely to keep the country´s borrowing costs in check in the years ahead. Bulgaria´s current account balance is set to flip back into deficit in 2012, as weaker external demand and elevated global energy prices take their toll.
While we do not expect a negative shock to balance of payments stability in the near term as Bulgaria has ample foreign currency reserves, our forecast for an average current account deficit of 2.5% of GDP to 2021 combined with our expectation for weak financial flows in the years to come could pose risks to longer-term external account stability.
Weaker global energy prices are set to dampen consumer price inflation (HICP) in Bulgaria in H212, leading us to revise-down our end-2012 price growth forecast to 2.0% year-on-year (y-o-y), from a previous forecast of 2.2%. Despite the country effectively importing its monetary policy from the European Central Bank, we do not expect looser monetary policy to translate to significantly higher inflation, given our relatively downbeat outlook for domestic demand.
Key Risks To Outlook
A disorderly default in Greece would wreak economic havoc on Bulgaria whose economy is highly exposed to the beleaguered Hellenic nation via trade, investment and banking sector avenues. Although this risk is somewhat mitigated by recent developments, in the event of a deterioration in the eurozone sovereign debt crisis we would be forced to revisit our forecasts for Bulgaria across the board.
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