Statement by the IMF Staff Representative on Bulgaria March 4, 2009

This 2008 Article IV Consultation discusses that Bulgaria has been hit by the global financial crisis, with clear signs that the country’s capital inflows-driven boom has come to an end and that the real economy is slowing down. Executive Directors have commended the Bulgarian authorities for their prudent policies that have built strong balance sheets in the public sector. Directors have also welcomed the authorities’ commitment to maintaining prudent fiscal policies, which will provide crucial support for the currency board arrangement.

Abstract

This 2008 Article IV Consultation discusses that Bulgaria has been hit by the global financial crisis, with clear signs that the country’s capital inflows-driven boom has come to an end and that the real economy is slowing down. Executive Directors have commended the Bulgarian authorities for their prudent policies that have built strong balance sheets in the public sector. Directors have also welcomed the authorities’ commitment to maintaining prudent fiscal policies, which will provide crucial support for the currency board arrangement.

1. According to preliminary flash estimates, GDP growth slowed to 3.7 percent year/year, down from 6.8 percent in Q3 2008. From a demand side perspective, the slowdown was driven by a slowdown in gross fixed capital formation (from 22.2 to 9.7 percent) and exports (from 3.8 to -6.8 percent). The flash estimate was close to staff’s projections (4.0 percent), and does not lead to changes in staff’s GDP projections.

2. BOP data confirm that capital inflows slowed sharply in the fourth quarter. Net capital inflows amounted to €701 million, down from €3,416 million in the third quarter. The decline was driven in part by a reduction in foreign borrowing (by €785 million), in inbound FDI (by €753 million), and in non-resident deposits (by €589 million). The counterpart of the decline in private capital inflows was a decline in official reserve assets by €2 billion euro.

3. The foreign reserve loss has stopped in February. Following a reserve loss of 0.6 billion euros in January, reserves increased by €0.1 billion in the first three weeks of February.

4. Private sector credit growth remained very low in January. The annualized month/month growth rates was 5 percent, slightly up from 1.6 percent in December. The year/year growth rate slowed to 30.0 percent, down from 31.1 percent in December, and 61.8 percent in January 2008.

5. Wage growth has remained high, further exacerbating staff’s concerns about competitiveness. Nominal wage growth slowed to 18 percent year/year in December, down from 25 percent in June. The decline was in line with the slowdown in inflation (from 14.7 to 7.2 percent), and real wage growth remained very high. The unemployment rate picked up from its record low of 6.0 percent in November to 6.1 percent in December.

6. In line with other countries in the region, financial markets continue to be under pressure. Since the staff report was issued, the Bulgarian stock market index (SOFIX) has lost another 4 percent, while sovereign CDS spreads have reached 634 basis points.

Bulgaria: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bulgaria
Author: International Monetary Fund