Economic challenges before Bulgaria in 2019

On November 8 the European Commission published it autumn economic forecast for the EU economy up to 2020. As it was expected the EC forecasts slowdown of the EU economy during the three-year period 2018 – 2020, in line with the forecasts of IMF and other international financial institutions. Economic development of EU 27 (without the UK) is expected to slow down to 2,2% in 2018, lower than the sprig forecast of 2,6%, while in 2019 the economic growth will weaken to 1,9% from the earlier expected 2,3%. Thus, the forecast of the economic growth of the EC for 2019 and 2020 are cut by 0,4 pp against the expectations only six months earlier. It is worth noting that according to the EC forecasts the global economy growth will slow down to 3.5% in 2019, which is more pessimistic even compared to that of the IMF according to which the world economy will advance by 3,7%, down from 3,9% expected in the spring. The main contributor to the global slowdown in the next two years according to the EC is the economic development of the EU Member-States. If EU is excluded from the forecast, the world economy is expected to expand by 3,8% in 2019, which is by 0,3 pp higher than if EU is included.

The global growth is weakening

The main reasons for the global slowdown can be summarized in the following way:

• The trade wars of the US president Donald Trump have very big negative impact on the global supply chains, erode the trade relations, raise the prices of the row materials, crudes and other imputes and detent the global economy’s growth.
• High energy prices push the global prices up, decrease the demand for petrol and additionally slow down the traded volumes. The unilateral withdrawal of the US from the deal reached with Iran and announced by the American president new sanctions against the country in August pushed further the price of the crudes, although only temporarily.
• The economic policy of the American administration at the same time overheated the US economy, which urges the Fed to react with rise of its main interest rates. Such a monetary tightening impact negatively the global capital flows and forces the investors to withdraw their investments from the emerging markets, which creates local financial crises in many highly indebted markets in foreign currencies, especially in US dollars. Such local crises we saw in second half of August, when almost all emerging markets were seriously affected by the sharp exiting of the short-term foreign investments, but the countries affected the most were Turkey and Argentina, where financial and economic crises broke out,not being overcome even up to now.

EU contributes essentially for global slowdown

In their projections of global growth, the views of IMF and EC coincides although, as it was pointed out, the EC expresses much more pessimistic attitude. Based on its expectation for the development of the global and EU economies, the EC forecasts the economic development of each Member-State. Thus, what characterizes the Bulgarian economy is that the whole burden of the economic slowdown of the country is concentrated in 2018, when it is expected the economy to reach a growth of 3,5%, down by 0,3 pp in comparison to the spring forecast of 3.8%. There is a possibility this forecast not only to materialize but even to surpass the real growth the country will report for the present year.

According to the express assessment of the National Statistical Institute (NSI) the Bulgarian economy is slowing down to 3% in the third quarter of 2018. This is the third quarter with a slowdown in a row since the beginning of the year after registered growth of 3,5% in the first and 3,4% in the second quarters. Even in case the Bulgarian economy grows in the fourth quarter close to the level registered in the first one, it appears almost impossible the annual growth this year to reach 3,5% and most probably it will be around 3,3%. In that regard the expectation of the EC for this year’s growth appears slightly optimistic. The forecast for the next year appears even more optimistic, when it is expected the Bulgarian economy to grow by 3,7%. This figure remained unchanged compared to the spring EC’s forecast.

It should be noted that two factors have compound impact to the slowdown of the Bulgarian economy:

1. At first place these are the emerging markets outside EU with which Bulgaria supports serious trade relations. In this case considerable impact on the Bulgarian economy has the economic conditions in Turkey, which deteriorated drastically after the financial crisis from August. The decline of the Bulgarian exports toward third countries outside EU for the first nine months of the year is 21,3%, while specifically toward Turkey, bilateral trade with which forms a quarter of Bulgaria’s exports to third countries, is even larger, namely 22,3%. This development in fact mitigates the impact of the countries outside EU on the Bulgarian economy and strengthens the influence of the Member-States, whose economic conditions become determinative for Bulgaria. Bulgarian exports toward EU already forms over 70% of the total Bulgarian exports, which represents a rise of 8 pp in respect to the same period last year, while the share of the Bulgarian exports toward third countries shrinks to 29% from 37% a year earlier.
2. The rise of the Bulgarian export toward EU predetermines the increased dependence of the Bulgarian economy on the EU. The main trade partners of Bulgaria within the EU are five Member-States, with which the share of the Bulgarian export forms 63%, namely Germany, Italy, Romania, Greece and France. The country with largest share of the Bulgaria’s export is Germany, which is responsible for 22% of the total Bulgaria’s export and with which the Bulgarian export rises by 19,1% by the end of August. The export toward Italy is the second biggest and forms almost 13% of the total toward EU, rising by more than 12% for the first eight months of the year. The same share of 12,6% of the total forms the export toward Romania and it is similar in nominal values as well. It increases by 10,2% as of the end of August. In the next table the amount, change and share of the Bulgarian export toward the mentioned Member-States is shown.

Table1.Bulgarian export toward its five largest trade partners from EU,Jan-Aug2018

Source: NSI

Taking into account the increased dependence of Bulgaria on the economic conditions of its EU trading partners it is interesting to consider the EC’s expectations for the economic development of the mentioned above countries during this and next year. As it can be seen from the following table in four out of the five largest trading partners of Bulgaria during this year it is expected additional slowdown even further to the already revised expectations from the interim EC’s forecast while the downgrades from the spring forecast are considerable. The single exception is Greece where a minimal improvement is expected connected to the finally started recovery of the Greek economy after a decade of economic contraction. The remaining four countries are expected to considerably slow down while the most prominent delay is presumed to take place in Romania, by considerable 0,9 pp compared to the spring forecast and by 0,5 pp compared to the interim one. What follow is Germany with expected deceleration of 0,3 pp and Italy with 0,4 pp. In 2019 the situation is very similar, when the exception is Italy taking into account its budget plan for the next year with inflated public spending and budget deficit that is a problem by itself and will impact negatively the future economic development of the country. The remaining four countries’ growth is expected to slow down by about 0,2 pp on average. Thus, it appears that the main trade partners of Bulgaria are Member-States with one of the largest economic slowdowns in the EU.

Table2.EC’s autumn forecastand change in the growth expectations of Bulgaria’s main trading partners in EU

Източник: ЕК

Optimistic expectations of Bulgaria’s economic growth

On the base of all said above it appears that the global economic development will impact negatively the Bulgarian economy and the question is whether the latest EC’s expectations for Bulgaria are not very optimistic. If it is expected the economic growth of the main country’s partners to decelerate in this as well as in the next year, the question that arises is whether Bulgaria can preserve the forecast economic growth only on the basis of internal factors, which are mainly two: the private and the public consumption.

Table3.Comparison of Bulgaria’s GDP components growth between the spring and the autumn EC’s forecast

Source: European Commission

As it was already mentioned, in its last economic forecast for Bulgaria the EC reduced its expectations for the economic growth of the country in 2018 from 3,8% to 3,5% while for 2019 the forecast remained unchanged. It became clear already that even for the present year the expectations seem optimistic taking into account the growth registered for the first three quarters. As it can be seen from table 3 the main reason for reduced expectations for 2018 is due to drastically shrunk exports, whose expected rise of 5% in the spring dwindled to 0,7% or almost 7 times lower. It is obvious that the main reason for this swing is the expected decline of the Bulgarian exports to third countries and especially to Turkey. Curtailed export impacts the import due to the fact that large part of the latter represents intermediate and raw materials servicing the export. The increased inflationary pressure in the country, the largest one within six years that shrinks the purchasing capacity of the Bulgarians, should be taken into consideration as well. In contrast, the Commission has an optimistic view regarding the consumer demand in 2018 taking into account that it forecasts an additional rise of the private demand by 1.6 p.p. to 6.5%. It appears that the  explanation should be searched in the accelerated credit activities in the country during the last year which presumably compensate the impact of the rising prices and in fact boost the inflation further. However, the table supports the view that the Bulgarian economy performed comparatively well in 2018 although below the levels reached during the two previous years and with clear signs of slowdown.

It is interesting to analyze, however, at what the Commission bases its expectation that the economic growth in 2019 will reach 3,7%. As it can be seen from the last column in table 3, the growth of exports is expected to lessen additionally by 1,9 pp and to fall below 3% while at the same time the imports will continue to rise with pace larger than that of the exports although its growth will decelerate as well by additional 1,6 pp The private consumption, which became the main engine in 2017 and 2018 will reduce its growth by 0,2 pp and the sole driver of economic growth that is expected to blow up the sails of the Bulgarian economy is the growth of the collective consumption. To some extent this is a reasonable expectation since the next two years are the last ones of the program period for absorption of EU funds, although for the previous years the government managed to absorb only about half of the planned capital expenditure.Namely, the under-utilization of these funds actually enabled the government to report serious surpluses that would have been spent opaque in the last weeks of the year.However, the question that remains is whether the government will be able to meet the planned capital expenditures, given that at least two types of elections will be held in 2019, while the processes that have triggered serious political uncertainty in the country may lead to new parliamentary elections, with a probable appointment by the President of a caretaker government, which will inevitably affect the assignment and implementation of the planned investment projects.

Budget 2019 is based on optimistic assumptions

On the basis of everything said so far, the fundament on which Bulgaria’s budget for 2019 is built is quite optimistic. It is now clear that the budget execution for 2018 will be on surplus, but the main reason for this is the underexecution of the government’s investment program for a third consecutive year, as well as significantly higher than planned inflation, which boosts tax revenues. At the same time the budget for 2019 is based on additional growth of the domestic consumption, expecting that it will exceed this year’s growth by 0.6 p.p., as well as an even higher capital expenditures of 9.5% exceeding the EC’s optimistic forecast. At the same time, the Ministry of Finance considers an additional rise of exports’ growth in comparison to this year, as well as a much more pronounced increase in imports. This additional imports may have a positive impact on economic growth but it is very unlikely to reach 6.7% on annual basis.

Table4.Comparison between the EC’s autumn forecast and the Budget 2019’s macroframe

Source: EC, MoF

On the basis of all said so far, it is very unlikely that the Bulgarian economy will reach a growth of 3.7% in 2019. However, this does not preclude the possibility the budget execution to end up with a surplus next year taking into account the expected underperformance of the government’s capital program. However, if economic growth is significantly lower than projected, if the exports slow down further in view of the economic situation in Bulgaria’s main trading partners and the capital program performs even better in comparison to this and previous years, possible problems with budget revenues cannot be excluded. Moreover, if the country is shaken by escalating political confrontation that can further lead to a slowdown of the Bulgarian economy.