ANALYSIS - No Fast Recovery from Recession for Bulgaria, Economy Needs New Engines

Even though the country can technically post a small positive growth next year, this will not mean that it had found its way out of the recession. The government will need to find new drivers for the economy to bring it back to the path of sustainable growth.

Bulgaria has been recording annual growth rates of about six percent in the past years driven by high domestic demand and capital inflows. Construction and services, which led the country's growth, were the worst hit by the global economic downturn.

Analysts and officials expect that Bulgaria will reach the bottom of the economic crisis by the end of this year or early next year. The economic contraction will slow down in the second half of next year and even a small growth could be expected.

The country’s statistics office NSI will release preliminary figures for economic growth in the third quarter on Thursday. According to NSI flash estimates released last month, gross domestic product (GDP) contracted by a preliminary 5.8% year-on-year in real terms in the third quarter, compared to a 6.8% growth recorded a year earlier. GDP fell by a real 4.8% on the year in the first nine months of 2009, compared to a 7.0% growth in the same period of 2008.

“There will be no fast exit out of the crisis,” Kristofor Pavlov, chief economist and head of economic research in UniCredit group’s local unit, UniCredit Bulbank, told SeeNews.

Pavlov believes Bulgaria's economy will record a 6.3% drop for all of 2009 and will see the end of the recession in late 2010 or in early 2011 though technically positive growth could be posted as early as the second half of next year.

Toby Iles, economist at the Economist Intelligence Unit, expects a 5.3% economic contraction this year and a 0.6% growth next year in Bulgaria. The economy will recover slowly and will be helped by net exports, he said.

“I think Bulgaria will have a U-shape recovery from the recession,” Iles told SeeNews.

“Moving forward, I will be expecting the pace of the contraction probably yet to deepen in the last quarter,” said Michal Dybula, macroeconomic analyst at BNP Paribas.

“I think if we move into next year this is going to be a very difficult year and I would not be surprised if we see also negative GDP readings in 2010. Obviously, if we take into account the sound fiscal policy framework under which the government wants to operate, than obviously there is risk for negative GDP,” Dybula said. His current forecast for the Bulgarian economy is for a contraction of 0.7% in 2010.

Agata Urbanska, an emerging market economist at ING Bank London, thinks that the country could have reached the bottom in the third quarter of this year but there is very significant risk that the bottom will be in the fourth quarter because of a two quarters delay in Bulgaria as compared to other countries.

Urbanska sees a contraction of 5.5% this year and a growth of 1.0% next year thanks to the low base effect.

“To turn to positive year-on-year growth we might need to wait until the second quarter of 2010 or, in a negative scenario, as long as in the third quarter of 2010. The second quarter we should see positive year-on-year growth - hopefully,” Urbanska told SeeNews.

Bulgaria will start exiting the recession when its main trading partners start to recover and lending activity picks up, Urbanska added.

Risk management company Coface Bulgaria, part of French credit insurance agency Coface, sees a 1.0% drop of the Bulgarian economy next year. The effects of the global economic crisis will bе notably felt in the next six to nine months, Coface Bulgaria manager Kamelia Popova said.

Although the economy will start stabilising in the second half of 2010, it will continue to feel the effects of the crisis for two more years, with jobless rate remaining high and real estate prices recovering slowly from the slump, Popova said.

Analysts agreed that Bulgaria should find new growth drivers, rely on exports rather than on domestic demand and investments, and find new competitive advantages of its economy. Many Western European companies will relocate their businesses in Eastern Europe and Bulgaria can benefit from this eastward drive, according to UniCredit Bulbank's Pavlov.

The cheap labour force, which has been one of the key incentives to invest in Bulgaria prior to the crisis, should be replaced by an educated labour force, Pavlov added. Structural and institutional reforms in the judicial, healthcare and education systems should be implemented.

Pavlov thinks the industrial sector will be the first to come back to positive growth rates after the recession ends in many of the country’s main trading partners in Western Europe. Demand abroad is recovering stepwise and that is why the industry will be the first to exit the recession, most probably in the first half of 2010. Services will follow, Pavlov said.

According to the government in Sofia, Bulgaria's economy would shrink by 4.9% this year, less than the initially projected drop of 6.3%, and will contract by 2.0% next year.

The country's central bank expects that GDP will fall 4.9% this year. The bank sees a zero or 0.5% growth next year under an optimistic scenario, while a 2.0% contraction can be expected under a pessimistic scenario, governor Ivan Iskrov said last month.

The International Monetary Fund forecast a 6.5% contraction of the Bulgarian economy in 2009 and a drop of 2.5% next year. The European Commission said in its autumn report that the country's GDP will drop by 5.9% this year and by 1.1% next year.