October 3 (SeeNews) - UniCredit Bulbank said it increased its projection for Bulgaria's economic growth in 2022, to 3.2% from 2.7% forecast in July, as the quarterly expansion of 0.8% in the three months to June 30 exceeded its expectations.
Bulgaria's economy is projected to undergo a shallow recession at the end of 2022 and in the first quarter of 2023, driven mostly by accelerating inflation and soaring energy prices, Bulgaria's largest lender, part of Italy's UniCredit Group, said in its September macroeconomic update.
The negative outlook is compounded by lower global demand driving down export volumes and the likely continued tightening of interest rates by the European Central Bank, which will lead to significantly higher lending costs than predicted in the bank's macroeconomic review in July.
As a consequence, UniCredit Bulbank downgraded its earlier gross domestic product (GDP) growth forecast for 2023 by 1.5 percentage points to 0.5%.
The lender also revised upwards its earlier projections on Bulgaria's consumer price inflation in 2022, putting it at 18.0% against 16.5% previously, on account of the global energy prices spike. Average annual inflation in 2022 was forecast at 15.4%, up from 13.7%. For 2023, the revision was at an even greater scale, to 10.1% from 7.8% pencilled in July, with forecasts rendered more uncertain due to the inability to gauge the more long-term development of natural gas prices.
With predictions for a fragmented parliament after Bulgaria's October 2 snap vote materialising, the bank's expectations of potential new general elections in spring 2023 look highly probable.
"Failure to form a stable government would leave the country without a clear policy direction at a time when the economy is entering a shallow recession and the cost-of-living crisis is aggravating. Unpopular structural reforms needed to unlock the country’s long-term growth potential are likely to lose further momentum," UniCredit Bulbank said.
Nevertheless, the lender expects Bulgaria's commitment to the adoption of the euro in 2024 to be reaffirmed, with parties with pro-Western geopolitical orientation likely to control around two-thirds of the seats in Bulgaria's 48th parliament.
UniCredit Bulbank also reaffirmed its budget deficit projection for 2022 at 5.1% of GDP on an accrual basis. However, the bank lifted its deficit forecast for 2023 to 5.5% of GDP from 3.5% predicted in the July report.
" We assume that fiscal support measures introduced in mid-2022 to contain the negative impact of high inflation will be prolonged until the end of 2023. On top of that, we assume that further fiscal measures equivalent to 0.5% of GDP will be deployed in an effort to shield the most vulnerable," the lender noted.
Bulgaria's electricity subsidy scheme for companies is likely to be replaced by a more selective mechanism which prioritises the worst-affected businesses and eliminates overly generous compensations for other companies, the bank suggested.
Inflation in Bulgaria quickened to 17.7% year-on-year in August, from 17.3% in July, most recent data from the statistical office shows.
Bulgaria's budget deficit is projected at 4.1% of GDP in 2022, but could reach 6.8% of GDP in 2023, caretaker finance minister Rossitza Velkova said in August.
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