Identifier
Created
Classification
Origin
05SOFIA1375
2005-08-02 14:51:00
UNCLASSIFIED
Embassy Sofia
Cable title:  

BULGARIA?S ECONOMIC OUTLOOK FOR 2005 REMAINS

Tags:  EFIN ECON EINV BU 
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UNCLAS SECTION 01 OF 02 SOFIA 001375 

SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SAVICH
TREASURY FOR ATUKAROLA

E.O. 12958: N/A
TAGS: EFIN ECON EINV BU
SUBJECT: BULGARIA?S ECONOMIC OUTLOOK FOR 2005 REMAINS
POSITIVE

REFTEL: Sofia 1272

UNCLAS SECTION 01 OF 02 SOFIA 001375

SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SAVICH
TREASURY FOR ATUKAROLA

E.O. 12958: N/A
TAGS: EFIN ECON EINV BU
SUBJECT: BULGARIA?S ECONOMIC OUTLOOK FOR 2005 REMAINS
POSITIVE

REFTEL: Sofia 1272


1. SUMMARY: The Bulgarian economy showed encouraging
growth of 6 percent in the first quarter of 2005, cementing
experts? views that the economy will continue to grow in
2005 despite the political turmoil surrounding the
formation of the new government. The Bulgarian National
Bank (BNB) issued a report the week of July 25 forecasting
GDP growth of between 5.4-5.8 percent for 2005. The report
affirmed the government?s forecast of moderate inflation of
3.5 percent and acknowledged the Central Bank?s
effectiveness in lowering credit growth. With delays in
planned privatizations, however, the government?s
expectations of 2.2 billion euro in foreign investment this
year may turn out to be unrealistic. This, in turn, would
increase the risk of a higher current account deficit. The
government?s Agency for Economic Analysis and Forecasting
has already revised upward its forecasted current account
deficit to 8.5 percent of GDP for 2005. END SUMMARY.

BULGARIA?S ECONOMY IS OFF TO A STRONG START


2. STRONG GDP GROWTH IN 1Q-2005: Following a record-high
GDP growth of 5.6 percent for 2004, GDP increased by 6
percent in the first quarter of 2005 led by an increase in
investment (up by 9 percent) and a pick-up in domestic
demand (up by 7.3 percent). The private sector, which made
up 66 percent of GDP, grew by almost 13 percent, while the
public sector was down by 8.6 percent. GDP details show
that the strong growth in the first quarter of 2005
reflected a strong outcome for industry (up by 8.2 percent)
and services (up by 7.4 percent). Agricultural output
declined by 1.7 percent.


3. GDP FOR 2005: Central bankers expect high GDP growth
rates to continue over the course of the next three
quarters, estimating GDP growth for 2005 at 5.4-5.8
percent. The government agreed with the IMF on a revised
economic program for 2005 which calls for a slightly lower
real GDP growth of 5.5 percent based on higher oil prices
and a slowdown in credit expansion.


4. MODERATE INFLATION: Despite predicted economic
expansion, the BNB?s report affirms the government?s
forecast of moderate inflation of 3.5 percent for 2005.
The Central Bank, however, cautioned that inflationary
pressures may increase due to higher oil prices and the
recent flooding in Bulgaria (reftel.) Between January and
June 2005, inflation stood at 1.2 percent.


5. DECLINE IN CREDIT GROWTH: The BNB?s report concluded
that the measures they took earlier this year have been
successful in moderating credit growth, and will lead to
the targeted credit growth rate of 30 percent (the IMF
recommends credit growth rate of 30-35 percent). The
growth rate in non-government sector credit slowed to 43.5
percent in June, five percentage points down relative to
May 2005.

RISKS: LOWER FDI, HIGHER CURRENT ACCOUNT DEFICIT


6. Bulgaria continued to attract foreign direct investment
(FDI) in the first months of 2005; however, it was at a
lower level - 422 million euro in January-May 2005 - than
the 483 million euro for January-May 2004. With
uncertainty over the completion of planned privatizations
this year, the government?s expectation of 2.2 billion euro
in FDI in 2005 ?- of which 900 million euro is to come from
privatization and 1,300 million euro from green-field
projects ?- may turn out to be high. Meanwhile, the
sizeable current account deficit widened once again in the
first five months of the year. The 2005 current account
deficit may overshoot the government?s projection of 7.6
percent or 1.6 billion euro. The current account deficit
increased by 34 percent, from 943.1 million euro in
January-May 2004 to 1.26 billion euro in January-May 2005.
The government?s Agency for Economic Analysis and
Forecasting has revised upward its projected current
account deficit to 8.5 percent of GDP.


7. COMMENT: Recent economic data indicate that Bulgaria?s
economy started the second half of the year on strong
footing. Analysts believe the political stalemate over the
formation of a new government is not threatening the
positive outlook of the Bulgarian economy, but note that
any delay in EU accession could negatively affect the
economy. Political considerations, however, have already
impeded the successful completion of several privatization
deals, which could not only overshadow other government
economic successes, but also restrict Bulgaria?s ability to
attract new foreign investments. Meanwhile, trade union
leaders and business representatives are urging politicians
to form a stable coalition government, which will secure a
positive review by the European Commission in the fall, and
move Bulgaria into the EU in 2007. END COMMENT.

LEVINE