LM Legal Services Blog

The Bulgarian economy will continue sinking in 2010. The decrease of the GDP will be of 1%, according to the Agency for Economic Analysis and Forecasts.  For 2009 the expectations are of a significant  decrease of the GDP of 6.3%.  Bulgaria will be in recession for two consecutive years.  The decrease of the investments and the retail index will continue in 2010.  The expenses in Bulgaria’s budget will not increase in order to avoid deficit.  The major reason for this is the world wide recession. Although there have been signs for upcoming end to the recession in the USA, the risks for the world and the European economy are still there.

The slowing down of the economies of Bulgaria’s major trading partners has led to shrinking of Bulgaria’s export. The export of goods has decreased by 30,7% in the first five months of this year and it is expected that the decrease will be 10,5% on an annual basis. This has its effect on the transport and freight. As result the total volume of the export will shrink by 12,3%. The limited crediting and the slow increase of the personal incomes has led to a decrease in the investments and the sales in the country itself. The expectations are that in 2009 the spending of the average household will shrink by 4.5% and of the government by 3%.

In the following years the domestic demand, which has been generating mostly by the foreign investments, will be hard to resume the growth of the  Bulgarian economy to the levels of the last years.  That is why the recuperation of the economy is expected to materialise through the export. Having in mind the current world wide tendencies, this will not happen in 2010.  To the contrary, the export will continue decreasing and the expectations are that it will shrink by 3,8% next year.  That is why the forecast is for economic decrease of 1% in 2010. This will be accompanied by relatively low inflation about 2,2%.

Now is the best time to buy a property. the property prices have dropped significantly and there are no expectations for further decrease, according to large estate agencies. The average decrease of the prices in Sofia since the beginning of 2009 is 6%. The price drop is more significant – of up to 15% – in affluent areas where the prices have been unreasonably high during the property boom, like the Doctor’s Garden in Sofia, as well as in areas with bad infrastructure. By the end of the year prices will drop further by 5-6% but not more, say analysts. Even if there are further price reductions, buying property now will be profitable in the long run. Buyers can naturally wait a bit longer but it is not sure how much of their money will be eaten by the inflation.

The development of the property market in the next few months will depend on the economic recovery and on the job security of the buyers. According to bankers, many governments work toward the increase of the amount of cash in their countries so the increase of inflation is a normal consequence of the recession. As Bulgaria is in the conditions of a monetary board, the inflation is imported and it is a sign of the recovery. However, the recovery will not be felt before the middle of 2010. In this connection, prices will fall further but only of properties which are of lower quality or those belonging to developers who are now experiencing cash problems.

Bulgaria has a budget surplus but it can easily slide into a budget deficit of 1.5% of the GDP, according to the Italian Unicredit Group. The recession in Bulgaria is inevitable and will last 2 years, say the analysts. According to the expectations, the country’s economy will shrink by 3% in 2009 and by another 1% in 2010. It is expected that the budget will move from 3% surplus in 2008 to a 0.4% deficit in 2009 and a deficit of 1,5% in 2010.

The inflation is expected to fall to 3.5% for 2009 and to 1,8% in 2010 – which will be one of the few positive effects from the shrinking of the economy. The other positive effect will be the decrease of the current account deficit.

The most serious problem of Bulgaria is the sharp decrease of the foreign investment in the country which is expected to lead to a high unemployment exceeding 10%. It is expected that the unemployment will reach 12% in the next year.

The foreign investment will be 50% less than last year – from 16.7% to 7.5% of the GDP.

The real increase of property prices in Bulgaria for the last year was 2.25% according to the Global Property Guide. This puts the country in the fourth place for price increase among 32 property markets across the world. In 2007 the nominal property price increase in Bulgaria was 19.68%. The United Arab Emirates hold the first place for 2008 with a price increase of 40.86%. Shanghai in China is in second place with 4.83% and Switzerland is in third place with 4%. Nominally, without taking the inflation into account, Bulgaria is in second place with a price increase for 2008 of 11.72%.

The property market in Bulgaria showed a decrease of 5.31% taking the inflation into account or nominally 4.15% in the last three months of 2008.

In the last year the property prices have increased only in eight of the 32 countries taking part in the survey, while in 20 there has been a decrease when compared with the inflation. In 2007 the situation was strikingly different – only in six of the countries there was a price decrease, while in 24 there has been an increase of the property prices.

Рublished in the Financial Times

By Kerin Hope and Theodor Troev in Sofia

There are warning signals everywhere, yet the European Union’s poorest member insists it can weather the global financial crisis.

Standard and Poor’s last month downgraded Bulgaria’s long-term debt to BBB. Fitch this month cut its rating to BBB- just one notch above junk bond status.

On Friday, the Bulgarian Industrial Association urged the finance ministry to redraft next year’s budget and cut the growth forecast from 4.7 per cent to 2 per cent of gross domestic product.

“We are witnessing an unprecedented global crisis… for the first time, the tensions in Bulgaria’s economy are caused not by internal but by foreign factors,” the association said.

However, Plamen Oresharski, the finance minister, rejects a suggestion that after bail-outs of Hungary and Ukraine by the International Monetary Fund, Bulgaria may be among the next in line.

“We are not in a similar position. Our banking system looks sound, with a good level of liquidity and healthy reserves,” he said. “Our concerns about the real economy are greater, but we still expect comparatively strong growth next year.”

Thanks to a record grain harvest, the economy is projected to expand this year by 6.9 per cent.

But the current account deficit – the highest in south-east Europe at about 24 per cent of GDP – appears unsustainable given an accelerating decline in foreign direct investment.

Investment inflows fell 48 per cent in the third quarter, according to central bank figures, following the collapse of a holiday-home construction bubble and a freeze on transfers by eurozone banks to their Bulgarian subsidiaries.

“Construction has been the most important growth driver, even more than in Spain, so the outlook is grave,” said Lubomir Christoff, a former chief economist at the central bank.

Sergey Stanishev, prime minister, has suggested Bulgaria should join the EU’s exchange rate mechanism next year. But although Bulgaria can point to a budget surplus and a low public debt (about 18 per cent of GDP), an annual inflation rate above 10 per cent rules out any chance of an early entry to the euro.

Mr Oresharski argues that an accumulated fiscal surplus of Lev12bn ($7.8bn, €6.2bn, £5.2bn) provides a cushion.

“One relief is that the government doesn’t have any short-term borrowing requirements,” he said.

In spite of rapid credit expansion since EU accession last year, total bank indebtedness is still low at about 30 per of GDP.

Lending is tight because foreign banks have lost access to funding from parent groups squeezed by the global credit crunch.

“We’ve been told to rely on our own resources, which means lending will slow,” said a senior executive at a foreign-owned bank.

Bulgaria’s currency board, which pegs the lev to the euro, is intended to eliminate foreign exchange risk. The arrangement also requires that money in circulation does not exceed central bank reserves.

With reserves at 180 per cent of currency in circulation, the lev was buttressed against an all-out attack on the currency board, Mr Oresharski said.

But other currency boards in the Baltics look less stable following Latvia’s request last week for EU help to fend off a crisis.