ANALYST FORECAST - Bulgaria Sustains Surging Economic Growth With Rising Industrial Output, FDI And Higher Demand For Financial Services

September 14 (SeeNews) - Rising industrial output and foreign direct investments as well as greater demand for financial services has helped Bulgaria achieve surging economic growth in the first half of the year, analysts predicted on Friday, ahead of the release of official statistics on Tuesday.

Two analysts told SeeNews they expect Bulgaria's gross domestic product (GDP) growth to be higher than the year-ago period at between 6.3 and 6.6% in real terms in the first half of the year. Bulgaria recorded 6.1% GDP growth in the first half of last year and 6.6% growth in the second quarter.

"The economic growth [in the first half] will be most probably higher on the year. That is how the year started - in the first quarter the growth was higher year-on-year," Georgi Angelov, senior economist at the non-profit Open Society Institute Foundation in Sofia, told SeeNews.

Bulgaria's economy grew by a real 6.2% in the first quarter, well above expectations and faster than the 5.5% annual rise recorded in the same period of 2006. According to analysts the main drivers of growth were rising foreign direct investment (FDI) and a corporate tax cut by five percentage points to 10%. The government of the European Union newcomer slashed the corporate tax as of 2007 in an effort to attract more investments.

"For the second quarter, we see economic growth of 6.5-7.0%, while for the first half - 6.3-6.6%," Angelov said.

Desislava Nickolova from Raiffeisen Research, the research department of Austria's Raiffeisen Zentralbank, was less optimistic and forecast slower GDP growth for the second quarter and first half.

"Our forecast is for real growth of 6.4-6.5% in the second quarter of the year which in turn will lead to a 6.3-6.4% economic growth in the first half, as the second quarter has traditionally higher weight," Nickolova said.

According to Angelov, the rising FDI and individual consumption were the key drivers of economic growth over the first half of the year.

"Investments are nominally growing by more than 40% - probably due to the low corporate tax and the entry into the EU," Angelov said.

"FDI has always made a positive impact," Nickolova said adding: " however they are not the key driver of the growth."

Bulgaria, which joined the European Union on January 1, has attracted large numbers of foreign investors in various sectors of its economy over the last few years, primarily in real estate, tourism, IT, telecommunications and finance. FDI reached 2.1 billion euro in the first half of the year and the country's forecast is that full-year FDI will top last year's record high figure of 4.105 billion euro. The head of the government's investment promotion body, Stoyan Stalev, said earlier this year Bulgaria would attract some 4.5 billion euro in FDI in 2007.

"Private consumption - if it keeps its high growth rates will also contribute to the accelerating growth of the economy," Angelov said.

Rising industrial output and high demand for services, especially financial services, are the key factors that have helped Bulgaria's steady economic growth, Nickolova believes.

"The industrial output and the supply of services will remain the key drivers of growth. Iindustrial output remained strong in the second quarter - data show it rose by some 10.5% over the quarter, which is a serious acceleration as compared to the 6.9% rise in the first quarter," Nickolova said.

"Regarding services, especially financial services, we think they made a significant contribution to the high growth in the second quarter as in the first days of May some 1.0 billion levs ($709 million/511 million euro), kept by the central bank as additional provisions against high credit growth were brought back into the banking system," she added.

"This automatically reflected on the lending growth, especially high in May and June."

Prior to Bulgaria's entry into the EU, the central bank gradually removed the administrative barriers that control the growth of lending to the private sector. However, the keen investment appetite of Bulgarian business and increased household expenditure has led to breakneck lending growth since the beginning of the year which forced the central bank to raise the mandatory reserves requirement for local commercial banks to 12% from the previous 8.0% as of September 1.

"Financial services are a sector with high growth thanks to the credit, leasing and stock exchange expansion," said Angelov.

According to both Nickolova and Angelov, the Bulgarian agricultural sector, hit by a serious drought in the spring, will negatively impact economic growth in the second quarter and first half of the year.

"The negative impact of the agriculture sector will be felt more in the third quarter of the year. Food prices have started rising since June," Nickolova said and added that the sector's negative effect will not be very significant as its contribution to GDP growth is currently below 10%.

FULL-YEAR FORECAST

The analysts see the country's full-year economic growth as higher than last year.

"For the moment, it looks as if 2007 economic growth will be higher as compared to 2006. A range of 6.5-7.0% looks realistic ," Angelov said.

The forecast of Raiffeisen Research was again more downbeat, but more optimistic than the previous forecast.

"Our estimates for the whole of 2007 have been recently revised upwards, as according to our latest forecast we expect the real growth of the economy to reach some 6.2%. Our previous forecast was for 6.0%," Nickolova said and added that "surprisingly good results in the first half - regarding industrial output, record low unemployment, the tourism sector" led to the forecast revision.

Bulgarian government officials have said they expect the country's economy to continue growing at rates of above 6.0% a year over the next few years. The International Monetary Fund also expects Bulgaria's economy to grow by a real 6.0% in both 2007 and 2008. GDP increased by 6.2% and 6.6% in 2005 and 2004, respectively.

Following are GDP growth forecasts made by the two analysts polled by SeeNews: