Bulgaria Business Forecast Report 2O12

We expect Bulgaria's economic increase to be weighed down by slowing accumulation request in the eurozone and persistent concerns over the eurozone debt crisis. We believe the slowdown in external request will weigh on Bulgarian exports, which when combined with only moderate increase in household spending, will feed through to lower real GDP increase in 2012.

Politically, we expect 2012 to be a difficult year for the ruling party. A combination of high public dissatisfaction with the government's seeming lack of evolution in the fight against corruption and failure to gain entry to the Schengen visa-free travel zone, combined with a weaker economic increase 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 estimate the fiscal deficit to narrow to 1.9% of GDP from our estimate of 2.3% of GDP in 2011 as we expect Bulgaria's government to continue with its fiscally prudent consolidation efforts. A combination of recovering revenue streams and restrained public spending will work to bring the deficit down. That said, there remains the risk for an expansion of government spending in the event that increase slows additional precipitously than we currently estimate.

Major Estimate Changes

The sharper than expected moderation in external request in Q211 has seen us revisit our real increase forecasts for Bulgaria. We now expect the country's economy to grow by 2.7% in 2012 as net exports will be less supportive of increase. Moreover, we expect only a weak recovery in domestic consumption on account of slower increase in the eurozone weighing on broad based economic sentiment and economic expansion.

Our estimate for Bulgaria's current account position has changed from a 2.7% of GDP deficit to a 1.0% surplus in 2011 owing to the very strong export performance in H111 which saw exports surge by 40.8% y-o-y. We then estimate the current account to return to a deficit of 1.1% of GDP in 2012. We expect the merchandise trade deficit to widen in 2012 on recovering domestic consumption that will push up imports. Preventing a additional severe widening of the deficit will be the services and transfers accounts which we foresee remaining in surplus over the estimate period.

We have revised down our estimate for the consumer price inflation (HIC P) to average 3.8% in 2011 and 3.4% in 2012, from 4.5% and 4.2% before. Our expectation for the world economic slowdown to translate to weakening of already weak domestic request-pull inflationary dynamics underpins this revision. Forestalling a additional pronounced moderation in HIC P will be still-high commodity prices that will keep cost-push inflation elevated.

Key Risk To Outlook

A disorderly default in Greece would wreak economic havoc on Bulgaria, whose economy is highly exposed to the former via trade, investment and banking sector avenues. In the event of a severe credit event, we would be forced to re-visit our forecasts for Bulgaria across the board.