Economic Policy Review ISSN 1313 - 0544

Bulgarian economy development and the world crisis

Author: Dimitar Chobanov / 09.10.2008
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The National Statistics Institute announced officially the preliminary data about the Gross Domestic Product (GDP) during the second quarter and respectively the first half of 2008. At the same time, however the situation on the international financial markets worsened significantly, as some of the largest investment banks got into a very difficult position and the main indices are falling sharply.  

The real growth of the GDP during the second quarter of the year had reached 7.1%, which shows continuation the trend during this period to achieve the fastest growth of this parameter. During the fist six months of the year the real growth of GDP and the gross added value is 7.1%. The main contributors to that are the sectors of industry and services which grew respectively by 7.4% and 7%, while the agricultural sector - by 6.5%. While with the first two sectors the trend of growing production is continuous, with the latter some awakening is observed, since after 2004 there was continuous reduction.  The reasons for the positive trends must be sought in the increased investments of capital in the industry and services, which contribute to increasing productivity and supply. On the other hand supply is stimulated by the increased money mass in the country as a result of the incoming capital flows and fast growth of the credits during recent years. On the other hand for the agricultural sector the investments are still very limited, there are many problems with parceling out of the land, use of old technologies, which make production strongly dependent on the climatic conditions and do not allow improved forecasting of the yields. The other factor, which is slowing down development, is that the sector relies to a large extend to assistance through various subsidies from the state budget and the European funds, but is not aiming at improving the competitiveness. The farmers are inclined to undertake protests, through which to ensure privileges at the expense of the tax payers, instead of trying to improve the quality and quantity of their production.

On the side of the elements of end-use the highest growth is observed in the gross-formation of capital which increases on the average by 22.7% for the half year, while the reserves have increased by 11.2%. The individual consumption had increased by 5.5%, imports - by 9.9% and the exports - by 6.9%. The external sector reached over 160% of the GDP, which is a sign for the increased openness of the Bulgarian economy. The deficit of the trade balance is slightly reduced in relative terms and reached 27.2% of the GDP, while during the first quarter it was 27.7% of GDP.

The gross savings on an annual base have increased to 14.2% of the GDP, the main factor for that is mainly the moderate growth of consumption and the increased current transfers due to receivables from European funds.

The Bulgarian economy achieved the third highest growth in Europe during the second quarter of 2008, only Romania (9.3%) and Slovakia (7.6%) are doing better according to this parameter. The outlook however is not favorable. The bankruptcy of Lehman Brothers, the difficulties of Merrill Lynch, AIG and the other large companies from the financial sector in the US is already a signal for a large scale crisis. It would affect unfavorably not only the economy of the US, but the Euro zone as well. That would reduce the external demand and could affect the abilities of the Bulgarian companies to export. In addition during a crisis the investments are reduced, since the perception of risk is changed in various economies, which would affect incoming flow of capital to the country as well. The European Central Bank and the Federal Reserve showed unambiguously that they would allow for large volume liquidity, which in the short term would help the participants on the market. In the longer term this would extend the period of adjustment to the new conditions and would help increase the inflation rate. At a later stage this would force more significant increases in the base interest rates, when the aim is lower inflation for the medium-term. Besides that saving of some financial institutions, which are considered too large, to be left to fail, would take place at the expense of the tax payers in the respective economic zones.

With respect to Bulgaria - the risks for its development are increased, as a result of the unfavorable external situation, as well as due to some internal factors. The saturation of the sectors of real estate and building and construction would not allow achieving such growth as it did at present. The crisis on the financial markets would probably make financing more difficult due to increased long term interest rates and as a result fewer projects would be profitable. In addition it is possible that some of the projects, currently being implemented, to prove unsuccessful which would force their liquidation. The result would be reduction of economic activities and employment, increased unemployment.  In the short run probably the growth of prices and wages would slow down.

It is difficult to forecast when exactly would these risks take place, but they should be a signal for the Bulgarian companies and people to become more cautious in the investments they undertake. The bankruptcy of large international banks is a clear indication that no one is insured against mistakes, particularly during a crisis. Even though there are safety mechanisms such a bank supervision, guaranteed deposits and possible refinancing by the central bank, in the case of systematic event, the risks remains and must be carefully managed. The intervention on the market must be limited to the minimum - only if there is a threat to the entire banking system.  The commercial banks must be left to cope by themselves and thus it would be possible to see which among them have better management.

As a whole the current positive results should not give too much confidence to the country's management. The period 2009-2010 would be difficult for the Bulgarian economy, since the risks of slow down of the economic growth are increasing. Under such conditions economic policy directed towards increasing the economic freedom is of particular importance. Taking into account the coming elections during 2009 it is very likely that the necessary reforms would be delayed again, which would limit the potential of future development.