The Economy In 2007 – a Forecast
The beginning of the New Year is a good occasion for making a forecast on the Bulgarian economic development in 2007. The economic policy of the government which will be significantly influenced by the EU membership, the stability of the governing coalition and the upcoming local elections are the factors that will have a vital role in the forecast maneuvering. Of course, we should not undermine the potential of the private sector to generate growth, but this growth might be significantly hampered by the government economic policy.
The accelerated integration of the Bulgarian economy with the EU member states economies, the increased volume of foreign trade, and the liberalization of the financial account will lead to increased dependency on the European Commission and European Central Bank decisions, while the influence of the IMF will be considerably diminished. The steady increase of the interest rates determined by the ECB, which is expected to continue in 2007, will reduce the available liquidity funds and respectively limit the investment opportunities in the Bulgarian economy.
After the relatively rapid increase of the Bulgarian GDP in 2006, it is likely that in 2007 it will be stabilized but still reach values of approximately 6% in real terms. The most important factor for the noteworthy increase of the GDP is the EU membership which motivated higher investment in restructuring of the Bulgarian companies with the aim to meet EU requirements, as well as the optimism coming from the belief they will be able to participate in the EU market.
Furthermore, in the last years the business climate in the country has been improved, which is connected not only to the EU accession but to the decreased direct taxation and the relief of some regulatory regimes. This is evident when making some international comparisons but again the Bulgarian business practices are still by far worse than the acknowledged world practices. A crucial success was the reduction of the corporate income tax to 10% but the other components are still not well developed and more efforts are required to improve them.
The increase of investment will continue to be higher than the increase of the GDP itself, but the differentiation between the two will not be so drastic in 2007. In all cases, the investment share in GDP will keep the value of approximately 30%. The stabilization of the demand for goods and services will lead to increase of savings up to 16% of the GDP values in 2007. The end result will be current account deficit identical to the one from previous years. Nevertheless, the EU membership will influence the domestic trade, which will alter the official data, respectively any forecast in the field become just hypothetical and tricky to make.
From the middle of 2006 the Bulgarian National Bank relieved the credit requirements for the commercial banks. The ECB increase of the interest rates made it less necessary for the BNB to have restrictive policy and this trend will continue in 2007. Moreover, with the EU membership the so-called single passport comes into force, which will allow legal financial intermediaries from any EU state to operate without restrictions in Bulgaria. This will lead to increased competition in the local financial market, which will have a positive influence on the economy as a whole.
After the significant increase of prices in 2006 (by almost 8%), in 2007 the increase will slow down and stabilize at values of about 4-5%. The continued increase of the prices, related to the increase of the credits, the higher values of the excise duties on fuels and alcoholic beverages, and the increase of the administratively set prices have inflationary pressures in the economy. At the same time higher interest rates in the international markets determined by the ECB (and the Federal Reserve System) contributing to higher interest rates in the Bulgarian market together with the withdrawal of liquidity funds via the budget surplus will counteract these inflationary pressures.
The labor market is highly probable to keep the trend towards job creation and reducing the unemployment levels. The rationale behind such reasoning is first the private sector development as a generator of employment opportunities, and second the EU membership, which eventually will lead to higher need of personnel in the public administration. The intention of the government to reduce the public administration by 10% throughout 2006 did not realize and 2007 will not be different in this respect.
The reduction of the payroll tax levels at the beginning of 2006 led to positive developments in the labor market and the wage levels in the country. In the present moment though it is not visible whether this trend will continue in 2007. Despite the lack of clarity regarding the payroll tax, it is expected that the increasing labor productivity will lead to higher wages in private sector, while the public sector wages will be used as a tool in government income policy by pushing private employers to increase their wage levels as well. Moreover, the decreased inflation will assure the increase of the wages in real terms.
The efficiency of the public sector is still quite low, especially in important fields like education and health care. In 2006, some efforts were made for improvement of the performance by introducing a single standard for the high school education, and financing the hospitals solely through the National Health Insurance Fund. Unfortunately, these efforts are far from being enough to solve the serious problems in the public sector. It is anticipated that the partial reform will continue in 2007 without changing significantly the quality of the public service.
The change in the Value Added Tax regime will influence the revenue in the budget, but still the budget surplus will be realized again. In comparative perspective the budget surplus will be lower than the one in 2006 because of the payment to the EU budget, which is an additional expense, but probably it will be about 2% of the GDP for 2007.
Overall, the Bulgarian economy will maintain its good performance in 2007. The main source for economic growth will be again the private sector, while the public one will continue having low efficiency. The positive changes in the Bulgarian economy in the last years increased the economic freedom in the country that respectively will lead to continuous economic growth but without perspectives to catch up with the fastest developing economies in the world.
