A lower-than-expected worsening of Bulgaria's trade environment will boost companies' hiring activity, which in turn is expected to contain inflation within lower levels than expected in the previous quarter, UniCredit Bulbank said in a quarterly economic update.
According to Bulgaria's largest lender, average consumer price inflation will abate to 9.7% in 2023, further decelerating to 4.8% in 2024. At the same time, budget deficit will rise by 0.5 percentage points to 3.3% of GDP this year, dropping to 2.8% in 2024.
The bank expects the country's real gross domestic product (GDP) to grow 3.3% in 2024, as inflation subsides, trade terms improve and global interest rate hikes are partially reversed.
"Importantly, a generous energy subsidy scheme deployed by the authorities should result in stronger exports than forecasted in October, which should also support growth this year," UniCredit Bulbank noted. The caretaker government earmarked about 7.7 billion levs ($4.2 billion/3.9 billion euro), or 4.7% of the projected GDP, for energy subsidies in 2022. That could nearly double to 14.4 billion or 7.6% of GDP in 2023, if no changes occur in relation to the scheme’s terms or in electricity prices.
In addition, higher euro-area interest rates will be reflected onto lev-denominated loan rates to businesses and households at a slower pace than expected in the previous quarter, which will help prevent a sharper contraction of the economy this year.
Bulgaria's electricity generation, food and metal manufacturing sectors are forecast to keep operating at full capacity as the war between Russia and Ukraine limits the role of those two countries in the global supply chains.
UniCredit Bulbank also expects ever-more-likely general elections to be held in March, which could yield a more stable governing coalition as political parties' motivations to take part in government rise with the end of winter and the projected recession. Moreover, a lasting term for the caretaker government could jeopardise the absorption of EU funding and the passing of necessary measures to complete euro adoption.
(1 euro = 1.95583 levs)