ANALYST FORECAST – Bulgaria’s Economy To Slow Down This Year, Zero or Negative Growth in 2009

Analysts polled by SeeNews see growth slowing down in the third quarter of the year as compared to the previous quarter and further dropping for the whole of 2009. The statistics office NSI will release the third quarter data on Monday.

An NSI estimate released last month showed that Bulgaria’s gross domestic product (GDP) grew by a preliminary 6.5% in the first nine months of 2008, faster than the 5.9% growth recorded a year earlier. In the third quarter Bulgaria's economic growth slowed down to a preliminary 5.6% from 7.1% in the second quarter but was higher than in the third quarter of 2007, when it was 4.9%, the NSI estimate showed.

According to Michal Dybula, analyst at BNP Paribas in Warsaw, growth in the third quarter will be around 5.5% year-on-year.

“Though the risk is tilted to the upside, as strong gross value added growth in agriculture might increase more markedly overall GDP readings for this period, similar to what has happened in Romania,” Dybula told SeeNews.

Industry over the quarter will be the underperforming sector since the monthly production data for July-September already signal that the slowdown has arrived, he added.

“I am forecasting 5.8% y/y growth this year with the risk skewed rather to the upside.,” Dybula said and added that main drivers have been investment and consumption, while net exports has subtracted from GDP growth.

Ruslan Stefanov, an economist with Sofia-based think-tank Centre for Study of Democracy, expects GDP growth will slow down by 0.5-1.0 percentage points in the third quarter as compared to the previous quarter while for the nine months, he expects growth similar to last year’s. However, the economy will drop quarter-on-quarter in the year’s last quarter, most probably by 1.0 – 1.5 percentage points, he said.

Acording to Dybula, the outlook for domestic demand is increasingly turning grim. Sharply deteriorating prospects for exports, tied to a tightening of borrowing conditions will undermine investments and this slowdown will feed into the labour market and consumption probably as soon as around the turn of the year, he said.

ECONOMY IN 2009

The government in Sofia expects the country’s economic growth to be 4.7% next year under a best possible scenario but under a pessimistic scenario, if the external environment deteriorates considerably, Bulgaria's economic growth may be 2.1%.

"We expect the global financial crisis will its have its strongest negative impact on the real economy in 2009. The main channels through which it is expected to affect the Bulgarian economy are investment demand and lower inflow of foreign capital," the government in its three-year programme for convergence with other European Union member states said.

“Next year I expect a broad-based deceleration in economic activity with negative GDP readings of 1.2% y/y,” Dybula said.

“For 2009, I expect a quick slowdown in gross domestic product [growth] … any increase above the zero would be positive, i.e. I expect a serious deceleration, at least for me the risk is that growth will slow down to zero or a little above zero,” Stefanov said.

Zero growth next year is also forecast by local industry lobby group Bulgarian Industrial Association, which has recently revised its previous forecast of 2.0%.

Construction, tourism and industry, particularly anufacturing, will be seriously hurt, Stefanov said.

“All those sectors whose product prices depend on the price of foreign raw materials – there will be a serious drop in the fourth quarter and thereafter,” added Stefanov.

Manufacturing and construction appear very vulnerable, given the slump in external demand for manufactured goods and the much tighter borrowing conditions and more difficult access to credit for construction, Dybula agreed.

“Anti-cyclical industries such as agriculture should fare relatively better in this environment, though potential base effects, given a very strong 2008 performance, point to a high probability of negative y/y growth readings in that sector next year, as well,” said Dybula.

According to Stefanov sectors which are more dependent on domestic demand such as services will be less exposed to shocks, however, he warned that domestic demand will slow down also as prices are seen rising and growth in wages and corporate revenue would drop.

Sectors dependent on government and European funding, like infrastructure, will be less affected provided the EU releases financing, Stefanov said.

The European Union, which Bulgaria joined last year, halted earlier this year payments worth a total of 560 million euro ($747.9 million) under the PHARE pre-accession programme, the SAPARD programme for aid to farmers and the infrastructure facility ISPA over suspicions of fraud. Last month, it said Bulgaria will lose 220 million euro under the PHARE programme due to mismanagement.

Dybula warned that Bulgaria’s “massive current account deficit, especially since competitiveness has deteriorated markedly during the last several months, due to quickly rising unit labour costs and strong appreciation of the real effective exchange rate,” is a particular risk for the country especially in an environment of scarce external funding.

($ = 0.7488 euro)