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1
October 2013
Analysts:
Hristiana Vidinova
Boryana Yosifova
Highlights
In July and August industrial and construction production continued the negative
trend and posted average declines in these two months by 2.4% yoy and 8.1%
yoy. No signs auspicate a positive change in the following few months.
Meanwhile, improvement was marked by trade on the external and domestic
markets. On average for July and August the real growth rate of retail trade
accelerated to 5.0% on an annual basis, while nominal export stepped up by
8.0% yoy.
Inflation posted a positive monthly value in September, albeit at a marginal rate of
0.1%, thus discontinuing the deflationary process, which started in March. Annual
average inflation remained positive (2.3%) and, similarly to the previous few
months, followed a downward trend.
The seasonally adjusted unemployment rate stabilized at a level of 13.1% in the
period July-September. Some deterioration could be expected by the end of the
year.
In September the budget balance was again negative – at the amount of BGN
147.8 mn. Cumulatively from the beginning of the year the fiscal deficit reached
BGN 360.5 mn (0.5% of the annual GDP forecast by Raiffeisen RESEARCH), but
remained significantly below the envisaged deficit for the whole 2013.
The fiscal reserve stepped up by BGN 248.0 mn in September, mainly due to a
domestic government bond emission, and amounted to almost BGN 5.0 mn as of
the end of the month. By the end of 2013 the government is expected to undertake
a foreign loan at the amount of EUR 360 mn, which will support the fiscal reserve.
In the same month, credit activity realized an improvement – the total amount of
loans picked up by BGN 241.2 mn, compensating for the decline of 202.2 mn in
August. Nevertheless, the annual rate of growth remained low (0.7%), notably
losing momentum compared to the previous few years.
Bad and restructured loans decreased by BGN 12.8 mn in September, while their
share in total loans (excluding overdraft) remained unchanged at 22.9%.
Similarly to the previous three months, deposits stepped up by an accelerated pace
in September – by 1.5% (EUR 711.0 mn). As a result, the annual rate of deposit
growth reached 7.4%.
The current account balance faced a record-high surplus of EUR 884.4 mn. It
resulted from positive services and income balances, while the improvement
stemmed from an untypically high, also positive, trade account.
Cumulatively for the period January-August the balance on the current account
reached EUR 1.3 bn (3.1% of the expected annual GDP). It exceeded all values
registered in the same period of the preceding years for which data is available.
Similarly to the current account, the financial account also posted a relatively high
flow in August, but an outgoing one (EUR -567.9 mn), mainly due to an outflow of
currency and deposits.
6,5% 6,4% 6,2%
-5,5%
0,4%1,8%
0,8% 0,5%
2,0%
7,3%
8,4%
12,3%
2,8% 2,4%
4,2%3,0%
2,0%3,4%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2006 2007 2008 2009 2010 2011 2012 2013e 2014f
Real GDP (% yoy) Consumer prices (avg, % yoy)
21,6%
17,2%
13,7% 14,6%16,2% 16,3%
18,5% 17,8%19,4%
3,4% 3,3% 2,9%
-0,9%
-4,0%-2,0%
-0,5%-2,1% -1,8%
-10%
-5%
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012 2013e 2014f
Public debt (% of GDP) General budget balance (% of GDP)
2
Real sector
Figure 1: Industrial production (yoy growth,
%)
Source: NSI, Raiffeisen RESEARCH
Figure 2: Construction production (yoy
growth, %)
Source: NSI, Raiffeisen RESEARCH
Figure 3: Permits issued for construction of
new buildings (gross building area, sq km
and % yoy)
Source: NSI, Raiffeisen RESEARCH
Figure 4: Permits issued for construction of
new buildings (annualized gross building
area, sq km.)
Source: NSI, Raiffeisen RESEARCH
The trends from the second quarter
continue in July and August
In July and August industrial and construction production continued to develop
negatively, while domestic and foreign trade registered a further improvement. So
far, the observed data do not impose a significant change in Raiffeisen RESEARCH
forecast for a minimum positive economic growth in the third quarter.
Industrial production continued to decline: on average for July-August it contracted
by 2.4% yoy. Negative dynamics decelerated slightly compared to the second
quarter, when industrial output shrank by 4.1% yoy. According to data on
industrial turnover, sales on the domestic market faced a larger drop in July -
August, while those on the external market realized a slight increase compared to
the same period of the previous year.
The manufacturing industry noted a marginal rate of increase - an average by
0.5% compared to July-August 2012 and, accordingly, had a marginal
contribution to limiting the fall in industrial production. The positive manufacturing
growth rate was due to an increase in July, but so far no evidence of sustained
improvements in its development is present. The largest positive contribution to the
dynamics of the manufacturing industry was brought by the manufacture of basic
metals and fabricated metal products, which stepped up respectively by 9.2 and
13.0%. Increases were also recorded in the production of investment goods,
including electrical equipment (9.6% yoy), motor vehicles, trailers and semi-trailers
(22.1% yoy), computer and communication equipment, electronic and optical
products (13.4% yoy). Meanwhile, manufacture of food products brought the
largest negative contribution to the dynamics of the manufacturing industry,
because it has a relatively large share in the industrial sector and shrank by 4.3 %
compared to July-August 2012.
The decline in industrial production in these two months was mainly due to the
production and distribution of electricity, heat and gas, which decreased by 7.1%
yoy. Output of mining and quarrying also declined: by 12.2% yoy.
As of the end of August, the highest proportion of firms in the industrial sector
pointed to the uncertain economic environment and weak domestic demand as
factors hindering their economic activity. According to а business survey,
conducted by NSI, these factors remained with а leading importance to the
industrial development as of October. Therefore, no significant change to the
unfavourable output trend is expected as of that month. However, improvement
could be present in the last months of 2013, driven by orders from the external
market, stimulated by the EU recovery.
The decline in construction accelerated from an average of 5.9% yoy in the second
quarter to 8.1% yoy in July and August. By sub-sectors, civil engineering marked a
stronger contraction: 10.1% yoy.
Gross building area of new buildings, for which permits were issued in the third
quarter of 2013 stepped up of 12.3 % over the same period of 2012. This growth
rate was stronger compared to thеse, registered in the last two years. Meanwhile,
on average for the last 12 months as of September, the same indicator also
improved on an annual basis. However, the latter represented a compensation of
the deterioration at the end of 2012, rather than a process of recovery to the levels
prior to the recession in 2009. In other words, the data on building permits
indicates an end of the trend of deterioration, observed in the recent months in line
with the recession in the EU, but signs of recovery of the construction sector from
the crisis in 2008-2009 have not been present yet.
The dynamics of domestic trade improved significantly during the summer months.
On average for July and August trade turnover expanded in real terms by
-30
-20
-10
0
10
20
І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ
2009 2010 2011 2012 2013
Mining Manufacturing
Electricity, gas, air condit. supply Industry-total
-50
-40
-30
-20
-10
0
10
20
30
40
І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ
2009 2010 2011 2012 2013
Consrtuction - total Civil engineering Building construction
38,8
22,4
13,6
22,9
-3,6
-18,1-8,3
-29,9-32,1
-50,4-53,8
-58,8
-52,6
-20,0-20,6-21,0
18,1
-17,2
7,7 9,5
-23,4
3,2
-14,9 -17,1
0,77,7
12,3
-60
-40
-20
0
20
40
60
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2007 2008 2009 2010 2011 2012 2013
sq. km %, rhs
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
I III I III I III I III I III I III I III I III I III I III I III
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
3
Real sector
Figure 5: Trade turnover in constant prices
(% yoy)
Source: NSI, Raiffeisen RESEARCH
Figure 6: Retail trade turnover in current
and constant prices (% yoy)
Source: NSI, Raiffeisen RESEARCH
Figure 7: Export of goods (nominal growth,
% yoy)
Source: NSI, Raiffeisen RESEARCH
8.2% yoy. Moreover, the growth rate accelerated compared to the second quarter,
when the reported figure was 1.7% yoy.
For the same two months wholesale trade, excluding motor vehicles and
motorcycles, increased significantly - by 10.2% yoy. The latter resulted from a
dynamic growth in the wholesale of agricultural raw materials, livestock, consumer
goods and telecommunications equipment.
Retail sale also marked a favourable development. On average for July-August the
volume of retail turnover stepped up by 5.0% compared to the same period of
2012, gaining momentum vs. the reported pickup by 1.4 % yoy in the second
quarter. Retail sale of food, beverages and tobacco rose in real terms by 10.1%
yoy, compared to only 0.8% yoy increase in April-June. The annual growth pace of
retail sale of textiles, clothing, footwear and leather goods reached 23.1% on
average in July and August.
Nevertheless, in these two months the dynamics of retail trade in
telecommunications equipment remained unfavourable (posting a real decline by
2.9% yoy). Meanwhile, the volume of retail trade in household appliances,
furniture and other household goods moved to positive territory, posting a 2.6%
yoy growth, after it had been falling for almost all months since the end of 2008.
The gradual decline in annual inflation since the beginning of 2013 and its
transition to negative territory as of August underpinned household purchasing
power and contributed positively to the realized real growth of retail turnover.
In addition to domestic trade, external trade also continued to develop favourably
in July and August. Exports of goods increased nominally by 8.0 % yoy on
average for these two months, and its dynamics accelerated vs. the 3.3 % growth
in the second quarter. The observed positive and increasing growth in the summer
months resulted from an increase in exports to countries outside the EU, whose rate
reached 14.0% yoy. The latter was due to the EU rebound from the recent
recession and, hence, due to the demand for imported goods by the EU countries.
For comparison, in 2012 Bulgaria’s exports to member states declined by 3.5%,
due to the weak EU economic activity.
-50
-40
-30
-20
-10
0
10
20
30
40
І ІV VІI X І ІV VІI X І ІV VІI X І ІV VІI X І ІV VІI
2009 2010 2011 2012 2013
Wholesale trade Trade with motor vehicles
Retail trade Trade - total
-20
-15
-10
-5
0
5
10
15
20
25
30
35
І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X ІV VІІ X I ІV VІІ
2008 2009 2010 2011 2012 2013
Current prices Constant prices
-20
-10
0
10
20
30
40
I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII
2012 2013
EU Non-EU Total
4
Inflation and labour market
Figure 8: Monthly inflation rate (%)
Source: NSI, Raiffeisen RESEARCH
Figure 9: Contributions to the cumulative
inflation rate for January-September (p. p.)
Source: NSI, Raiffeisen RESEARCH
Figure 10: Producer prices in the industrial
sector (%)
Source: NSI, Raiffeisen RESEARCH
Marginal positive inflation in September
Stabilization of the unemployment rate
The deflation trend, which was observed during the current year, discontinued in
September. The monthly inflation was positive for the first time from February
2013, although at a marginal rate of 0.1%. Food prices faced a seasonal rise (by
1.0 % mom) and therefore had a positive contribution to the change of the overall
price level. The biggest price increase was marked by vegetables (10.6% mom),
while the products coffee, tea, cocoa, milk and milk products, eggs, meat and
meat products posted rises in the range of 0.5-1.0% mom. Meanwhile, a
significant decline of 4.3% was recorded in the prices of animal and vegetable oils
and fats.
Services prices decreased by 1% compared to August, which almost entirely offset
the effect of the rise in food prices, and therefore left the price level almost
unchanged compared to the previous month. Package holidays and travel services
marked the most significant monthly price drops (correspondingly by 18.8% and
11.6%), which stemmed from cheaper offers in the end of the tourist season. As for
the other services, most of them scored price increases, albeit less dynamic ones:
education (excluding tertiary ) (2.4% mom), repair of furniture , furnishings and
floor coverings (1.7% mom), repair of household appliances (0.4% mom),
maintenance and repair of personal transport equipment (0.4% mom), domestic
services (0.4%), etc.
On average in the group of non-food prices, no change in the price level was
observed compared to August, but for individual commodities there were
movements. Similarly to the previous month, gaseous fuels became more expensive
(by 1.8% mom), and the prices of fuels and lubricants for personal transport
equipment continued to rise (0.7%). As a consequence, these changes had a
positive contribution to the change in the price level during the month. Meanwhile,
price dynamics in the opposite direction were marked by equipment: photographic
and cinematographic equipment and optical instruments (down by 1.3 % mom),
recording media (down by 1.0% mom), information processing equipment (down
by 0.9% mom) and equipment for the reception, recording and reproduction of
sound and picture (down by 0.6% mom).
In catering there was a marginal deflation of 0.1% compared to August, but this
change did not impose a significant effect on the overall price level.
Since the monthly inflation was minimal, as of September the annual inflation rate
remained in negative territory. It reached -1.6% vs. -0.7% in August and it should
be noted that so high annual-based deflation rates have not been reported since
1999. Most significant contributions to the annual price level decline were brought
by services (-1.1 p.p.), followed by non-food products (-0.6 p.p.) and foods (-0.1
p.p.) On the one hand, the deflation process is related to the fact that economic
activity lags behind its potential, and is particularly influenced by the weak
domestic demand. On the other hand, the low international prices and declines in
administrative price also contributed to the observed deflation in 2013.
In contrast to March-June, when industrial producer prices were stepping down, as
of the end of September they remained unchanged compared to the previous
month. Therefore, no pressure towards consumer deflation is expected in the
following months on the account of producer prices. This, combined with a
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
I III V VII IX XI I III V VII IX XI I III V VII IX
2011 2012 2013
Inflation Seasonally adj. inflation, 12-month moving average
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
Foods Non-foods Catering Services
-2
0
2
4
6
8
10
І ІІ ІІІ ІV V VІ VІІ VІІІ ІX X ХІ ХІІ І ІІ ІІІ ІV V VІ VІІ VІІІ ІX
2012 2013
Monthly growth Annual average growth
5
Inflation and labour market
Figure 11: Annual average inflation rate
(%)
Source: NSI, Raiffeisen RESEARCH
Figure 12: Unemployment rate (seasonally
adjusted, %)
Source: Eurostat
Figure 13: Unemployment rate in the EU
countries1 in September 2013 (seasonally
adjusted data, %)
Source: Eurostat
1 Data on Estonia, Greece, Latvia, Hungary
and United Kingdom is not available
seasonal rise in prices in the last quarter of the year, is expected to result in
positive and significant monthly values of inflation to be reported by the end of
2013.
In contrast to the monthly and yearly-based inflation, the annual average rate
remained positive as of September, mainly due to price level increases in late
2012 and early 2013. However, due to the deflationary pressures, average
annual inflation has been falling and this trend is expected to continue until the end
of the year. In September its rate amounted to 2.3%, falling from 3.5 % at the end
of H1 2013 and 2.9 % in August.
***
In July-September the seasonally adjusted unemployment rate stabilized at 13.1%,
according to Eurostat data. As of September, the unemployment rate remained
above the average rate in the EU 28. The latter amounted to 11.0%, similarly to
almost all other months since the beginning of 2013. Although the September
unemployment rate in Bulgaria was the highest for the past ten years, as a positive
fact should be accounted that the rising trend in the unemployment coefficient,
which began with the recession in the country, has discontinued.
However, the decline in GDP, firms’ precautionary behaviour and the fall in profits2
that were observed in April-June, can be expected to affect the labour market by
the end of 2013, taking into account that the labour market usually reacts by a lag
to the domestic economic activity. Similarly, a noticeable improvement in the
labour market can be expected in the second half of 2014, as a result of the
predicted acceleration of economic growth in late 2013 and early 2014.
2 According to NSI data on GDP, gross operation surplus and mixed income for Q2 2013 and annual-
based rates of growth
0%
1%
2%
3%
4%
5%
I III V VII IX XI I III V VII IX XI I III V VII IX
2011 2012 2013
0
2
4
6
8
10
12
14
16
18
20
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Au
stri
a
Ge
rma
ny
Lu
xe
mb
ou
rg
Ma
lta
Cze
ch
Re
pu
bli
c
Ne
the
rla
nd
s
De
nm
ark
Ro
ma
nia
Sw
ed
en
Fin
lan
d
Be
lgiu
m
Slo
ve
nia
Po
lan
d
EU
28
Fra
nc
e
Lit
hu
an
ia
Ita
ly
Bu
lga
ria
Ire
lan
d
Slo
va
kia
Po
rtu
ga
l
Cy
pru
s
Cro
ati
a
Sp
ain
6
Fiscal sector
Figure 14: Consolidated budget cash
balance by months (BGN mn)
Source: MoF, Raiffeisen RESEARCH
Figure 15: Structure of the budget revenues
in September 2013 (%)
Source: MoF, Raiffeisen RESEARCH
Figure 16: Structure of the budget
expenditures in September 2013 (%)
Source: MoF, Raiffeisen RESEARCH
Figure 17: Cumulative revenues and
expenditures for January-September by
years (BGN bn)
Source: MoF, Raiffeisen RESEARCH
Budget deficit of around BGN 150 mn in
September
Domestic bond emission boosts the fiscal reserve
In September, the budget balance was again negative - at the amount of BGN
147.8 mn. Cumulative from the beginning of the year the budget deficit reached
BGN 360.5 mn (0.5% of the projected Raiffeisen RESEARCH GDP for 2013). In
comparison to the first nine months of 2012 the budget balance diminished by
BGN 608.6 mn. However, having in mind the envisaged budget deficit of BGN
1.6 bn for the whole year, neither the negative monthly balance, nor the decline
on an annual-basis, was unexpected. More precisely, it can be said that the
execution of the planned budget deficit in the recent months has been kept
relatively slow, probably in consideration with the amount of the fiscal reserve, and
hence a large part of the envisaged expenditures can be expected to be
concentrated in the last months of the year.
During the month revenues and grants amounted to BGN 2.3 bn, increasing by
BGN 133.9 mn (6.1%) compared to September 2012. Their dynamics
decelerated vs. August when an annual growth of BGN 178.5 mn (8.1%) was
recorded. By components, tax revenues and grants posted the largest increases
compared to September 2012 - respectively by BGN 105.6 mn (6.2% ) and BGN
111.7 mn ( 80.4%). A part of the positive annual change was offset by a decline
in non-tax revenues - by BGN 83.5 mn (24.7%). Cumulatively for the first nine
months of 2013 revenues and grants amounted to BGN 21.3 bn, stepping up by
BGN 1.3 bn (6.6%) compared to the same months of 2012. For January-
September non-tax revenues remained almost unchanged compared to a year
earlier, while tax revenues rose by BGN 529.5 mn (3.3%). Nevertheless, the
negative annual inflation as of September, as well as the weak economic activity in
the country, has been limiting the amount of tax revenues. With regard to grants, a
major increase by BGN 718.3 mn (62.6%) was marked.
In September, budget expenditures totalled to BGN 2.4 bn, exceeding the amount
of revenues by BGN 75.4 mn. The rest of the deficit was formed by the
contribution of the government to the EU budget, at the value of BGN 72.4 mn.
The annual expenditure growth during the month posted one of the most sizeable
expansions from the beginning of 2013: BGN 416.4 mn. Capital expenditures
and also social expenditures and contributions were the main two expenditure
items, behind the overall expenditure increase over September 2012. They
stepped up respectively by BGN 233.4 and BGN 98.7 mn and could be expected
to stimulate domestic demand in the economy.
Cumulatively for the first nine months of 2013, budget expenditures reached
around BGN 20.9 bn, while the contribution to the EU budget totalled to BGN
747.1 mn. Compared to the same period of 2012, expenditures rose by BGN 1.8
bn (9.5%), i.e. more dynamically than revenues did. Social costs and scholarships
faced the largest annual-based increase: by BGN 638.3 mn (7.2%), which is
probably mainly related to the higher unemployment rate in the current year. Of
relatively smaller sizes, but also increases over January-September, were reported
in the capital expenditures (by BGN 276.8 mn), wages and salaries of the staff (by
BGN 244.3 mn) and social and health insurance contributions (by BGN 231.0
mn).
-1 000
-800
-600
-400
-200
0
200
400
600
I II III IV V VI VII VIII
Monthly balance, 2012 Monthly balance, 2013
Cumulative balance, 2012 Cumulative balance, 2013
78,1%
11,0%
10,8%
Tax revenues Non-tax revenues Grants
15,0%
4,6%
14,3%
1,5%45,2%
3,8%
15,6%
Wages and salariesSocial and health insurance contributionsMaintenanceInterestsSocial expenditure and scholarshipsSubsidiesCapital expenditure and net state reserve gain
0
2
4
6
8
10
12
14
16
18
20
22
2011 2012 2013
Revenues and grants Expenditures Contribution to the EU budget
7
Fiscal sector
Figure 18: Fiscal reserve (BGN bn)
Source: MoF, Raiffeisen RESEARCH
In September, the fiscal reserves stepped up by BGN 248.0 mn and amounted to
nearly BGN 5.0 bn. During the month the government issued one-year treasury
bonds worth BGN 300 mn, at 0.6% yield, which was the main reason for the
pickup of the fiscal reserve.
In the last quarter of 2013 a budget deficit of BGN 1.2 bn is expected, in order
the planned annual deficit of BGN 1.6 bn to be executed. A part of the deficit is
expected to be funded from the fiscal reserve, which in September stood at about
BGN 500 mn above its minimum allowed value of BGN 4.5 bn for the end of
2013. The remaining amount, needed for financing of the deficit is expected to be
provided by an external long-term loan. Until the end of the year the government is
expected to borrow EUR 360 mn, in Schuldschein3 instrument, for which Raiffeisen
Bank International and Deutsche Bank are intermediaries.
3 a debt security (in the form of note), typical for the German market
0
1
2
3
4
5
6
7
8
9
10
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009 2010 2011 2012 2013
8
Monetary sector
Figure 19: Contributions to the annual
growth of M3 (p. p.)
Source: BNB, Raiffeisen RESEARCH
Figure 20: FX coverage of the monetary
base and M3 (%)
Source: BNB, Raiffeisen RESEARCH
Again positive net bank financial assets
Positive lending growth in September
In September, the money supply (M3) increased by 0.7% on a monthly basis,
slowing down from 1.5 % growth in August. Deposits redeemable at notice up to 3
months posted the largest contribution for this dynamics as they stepped up by
3.0% mom. The monthly pickup in M3 was also driven by deposits with agreed
maturity up to 2 years, which marked an increase on a monthly basis for the first
time since the beginning of the year (by 0.4%). The latter indicates that the effect of
the income interest tax, which was introduces in January and led to the
transformation of term deposits into sight deposits and other savings instruments, is
probably exhausted. Overnight deposits also rose during the month - by 0.6%, but
their rate of increase lost momentum compared to the previous few months.
As to the annual-based changes, the money supply growth rate accelerated to
8.1% in September. Nevertheless, it remained close to the observed dynamics in
the preceding three years and corresponded to a relatively weak economic
activity. By components, the yearly-based trends remained without a significant
change. The largest contributor to the annual growth of M3 were deposits
redeemable at notice up to 3 months (6.6 p.p.) as it expanded by 69.5% yoy.
Overnight deposits also had a significant positive effect to money supply dynamics
by 5.2 p.p., resulting from an increase by 21.6%. At the same time , the amount of
deposits with agreed maturity up to two years declined by 8.9% compared to
September 2012 and had a negative contribution by 4.7 p.p. to the change in
M3.
As of the end of September, the assets of the Issue Department of the Bulgarian
National Bank amounted to EUR 14.9 bn. They stepped up on a monthly basis by
EUR 62.1 mn, offsetting the decline by almost the same amount in August.
By components, the observed increase of BNB’s reserves was mainly on the
account of the government deposit, which rose by EUR 122.5 mn. The latter
stemmed from a pickup in the fiscal reserve, primarily due to an internal issue of
government bonds for about EUR 150 mn, which was placed in September. Bank
deposits at BNB continued their upward trend (rising by EUR 73.5 mn compared to
August), which is associated with the deposits growth and the presence of high
liquidity in the banking system. Meanwhile, notes and coins in circulation and
liabilities of BNB to other depositors diminished respectively by EUR 32.5 mn and
EUR 26.8 min, while an even larger decline was realized by the deposit of BNB’s
Banking Department - by EUR 74.7 mn.
On a yearly basis BNB’s FX reserves diminished by EUR 569.3 mn. This change
was driven by a decline in the government deposit by EUR 1.1 bn (mainly due to
repayment of a Eurobond emission in January 2013) and in the deposit of the
Bank Department of BNB by EUR 562.5 mn. A part of this drop was offset by rise
in notes and coins in circulation (by EUR 358.4 mn) and bank deposits at the BNB
(by EUR 621.9 mn).
At the end of September 2013 the coverage of the monetary base with
international reserves remained almost unchanged on a monthly basis at 165.1%.
Excluding the government deposit from the calculations, the coverage of the
monetary base with international reserves fell to 138.8% compared to 140.1% at
the end of August. Both ratios remained significantly above the necessary 100%
for the stability of the currency board.
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2007 2008 2009 2010 2011 2012 2013
Money outside banks Overnight deposits
Deposits w/ maturity up to 2 years Deposits red. at notice up to 3 months
Broad money M3
30%
40%
50%
60%
150%
170%
190%
210%
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009 2010 2011 2012 2013
FX reserves/ Monetary base FX reserves/ M3 (rhs)
9
Monetary sector
Figure 21: Net foreign assets of banks
(BGN bn)
Source: BNB, Raiffeisen RESEARCH
Figure 22: Loans (% yoy)
Source: BNB, Raiffeisen RESEARCH
Figure 23: Average annual interest rates on
new loans (%)
Source: BNB, NSI, Raiffeisen RESEARCH
Figure 24: Deposits (% yoy)
Source: BNB, Raiffeisen RESEARCH
In September bank net foreign assets remained in a positive territory, which they
entered in August for the first time since 2007. Their value even increased in
September - by BGN 58.3 mn to BGN 239.3 mn. This dynamics entirely stemmed
from a decline in foreign liabilities (by BGN 123.4 mn), mainly due to a
withdrawal of deposits by non-residents of the country (by BGN 124.4 mn). A
similar pattern was observed with regard to the deposits of Bulgarian banks
abroad – a withdrawal by BGN 137.3 mn. Meanwhile, bank foreign assets on the
account of repurchase agreements increased by BGN 101.9 mn, while their cash
in foreign currency fell by BGN 27.9 mn. The cumulative improvement in bank net
foreign assets from September 2012 reached a significant size: almost BGN 2.9
bn. The latter was primarily on the back of increased investments in securities
abroad (BGN 1.1 bn) and a decline in foreign deposits in the country (BGN 1.5
bn). Also, as of September, an annual growth of nearly BGN 2.0 bn was
registered both on the account of foreign assets (loans) and foreign liabilities
(repos) because of a one-off deal of one bank in November 2012. However, the
latter had no effect on the overall dynamics of net assets.
In September lending activity marked an improvement. The total amount of loans
increased by BGN 241.2 mn (0.5%) on a monthly basis and offset the August
decline by BGN 202.2 mn (0.4%). However, the annual growth rate remained low
(0.7%), significantly slowing down compared to the previous few years and even
compared to the period of the recession.
Almost all of the increase of lending activity during the month was due to a pickup
in loans to non-financial corporations: by BGN 237.3 mn. Nevertheless, corporate
loans’ growth rate decelerated markedly compared to the last two years and
amounted to 1.4% yoy as of the end of September.
As to household loans, only a marginal increase of BGN 3.9 mn was recorded in
September. As a result, the annual lending growth in this segment remained
negative, but slowed down to 0.6% yoy.
Considering the interest rates as determinants to demand for loans, the average
annualized interest rate on new corporate loans posted a decline from early-2013
– it fell from almost 9.0% in January-April to 7.7% in September. Interest on new
mortgages remained almost unchanged from the beginning of the year. With
regard to new consumer loans, the average interest rate rose to 11.6 % from the
minimum rate for the last four years at 10.4% in April 2013. Meanwhile, annual
inflation remained negative and kept stepping down. It amounted to -1.6% in
September, compared to -0.7% in August. Therefore, as of September the real
interest rates continued to rise, reaching record high levels, which were observed
only during the recession in 2009. This process imposes a restraining influence on
the demand for loans.
Bad and restructured loans decreased by BGN 12.8 mn in September, after a
decline by BGN 49.8 mn in August. Nevertheless, their share in total loans
(excluding overdraft) remained unchanged: 22.9%. Cumulatively from the
beginning of 2013, bad and restructured loans stepped up by BGN 107.5 mn.
Similarly to the previous three months, deposits marked an increase by an
accelerated rate of BGN 711.0 mn (1.5%) on a monthly basis. As a consequence,
the annual deposit growth reached 7.4%.
The main part of the increase in deposits in September was due to the corporate
sector (by BGN 553.5 mn, which is a relatively big monthly increase on the
backdrop of the previous four years). The latter is probably due to higher revenues
from export combined with precautionary saving behaviour of the firms.
Household deposits also picked up during the month: by BGN 157.5 mn (0.5 %).
The annual rate of growth slowed slightly and amounted to 8.1%.
-14
-12
-10
-8
-6
-4
-2
0
2
4
I V IX I V IX I V IX I V IX I V IX I V IX I V IX
2007 2008 2009 2010 2011 2012 2013
-5%
0%
5%
10%
15%
20%
25%
30%
35%
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009 2010 2011 2012 2013
Non-financial enterprises Households
-4
-2
0
2
4
6
8
10
12
14
16
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
2007 2008 2009 2010 2011 2012 2013
Corporate loans Consumer loans
Mortgages Annual inflation
-15%
-10%
-5%
0%
5%
10%
15%
20%
I IV VII X I IV VII X I IV VII X I IV VII X I IV VII
2009 2010 2011 2012 2013
Non-financial enterprises Households
10
External sector
Figure 25: Current account (EUR mn)
Source: BNB, Raiffeisen RESEARCH
Figure 26: Trade balance (EUR mn)
Source: BNB, Raiffeisen RESEARCH
Figure 27: Foreigners travelling to Bulgaria
for tourism June-August 2013 by country
(%)
Source: NSI, Raiffeisen RESEARCH
Figure 28: Revenues from foreigners
travelling to Bulgaria June-August (EUR mn)
Source: BNB, Raiffeisen RESEARCH
Record high trade balance
and large financial outflow in August
Тhe current account posted a record high surplus of EUR 884.4 mn in August. A
positive balance is typical for this particular month, mainly because of revenues
from tourism and export of agricultural production, but not of such significant
volumes. Cumulatively from the beginning of the year the balance of the current
account reached EUR 1.3 bn (3.1% from the forecast GDP for the year) and
exceeded the observed data during the same period in the previous years, for
which data is available. From one side, the improved current account is a result of
a favourable growth of export and inflowing transfers (mainly from EU funds). From
the other side, this is connected to the realized outflow on the financial account,
which, in addition to the current uncertainty in the country, limits the economic
activity and leads to a decline in import.
Typically for August, net services brought the most considerable contribution to the
positive balance of the current account. Their value was EUR 587.0 mn during the
month, similarly to the amount in July (EUR 575.9 mn). Export of services
contracted on an annual basis by EUR 10.7 mn, which was fully compensated by
a decline in the import of services by EUR 34.8 mn. As a result, net services
improved slightly over the previous year. The revenues from foreigners travelling to
Bulgaria during the period were high (amounting to EUR 634.3 mn), which was а
characteristic feature of the active tourist season. Although the value remained
high, no significant improvement compared to the previous years was marked –
there was only a slight increase of 2.4% vs. August 2012. The most notable
contribution to the rise in the number of travels of tourists to Bulgaria was made by
Russians, while the flow of EU tourists remained almost unchanged compared to
the previous year.
The trade balance brought the most significant contribution to the improvement of
the current account during the month. In contrast to its usual negative value, net
merchandise trade registered a surplus of EUR 125.14 mn in August. For the last ten
years surplus of trade account was only registered in August 2011, but in a
smaller value. Compared to a year earlier, the trade balance improved tangibly:
by EUR 255.5 mn. Cumulatively from the beginning of 2013 it remained negative
(EUR -1.3 bn), but stepped up considerably compared to the same period of the
previous year - by EUR 1.1 bn. The improvement in August resulted from a
favourable trend of merchandise export (growth by 6.9% yoy), and also from with
a decline in import (by 6.4%). Perhaps, similarly to the previous two months, raw
materials used in food production had the most significant contribution to the
observed export expansion. Agricultural goods have a large share in the structure
of the export during the summer months and the data for the current year’s harvest
is relatively favourable. On the back of envisaged recovery of the European
economy and an increase in the demand for Bulgarian goods, the favourable
export dynamics is expected to continue until the end of the year. On the other
hand, the decline in import was probably mainly on the account of investment
goods, in line with the contracting capital formation during the year. On average
for January- August export expanded by 7.9% on an annual basis, but import
declined by 0.4% yoy.
The income account remained negative in August, but marked a considerable
improvement compared to a year ago – it grew by EUR 134.6 mn and totalled to
EUR -55.5 mn. The deficit contraction stemmed from a reduced investment income
outflow, which is related to the smaller FDI in the country.
Current transfers were developing favourably and their importance, as a foreign
source of financing to the economic and investment activity in the country,
4 It should be taken into account that the data is preliminary and subject to revisions
-800
-600
-400
-200
0
200
400
600
800
1000
I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII
2010 2011 2012 2013
Trade balance Services, net
Income, net Current transfers, net
Current account
-1000
-800
-600
-400
-200
0
200
I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Germany14%
Greece8%
United Kingdom4%
Poland5%
Romania9%
Other EU countries
19%
Russia15%
Ukraine7%
Other countries19%
0
100
200
300
400
500
600
700
2006 2007 2008 2009 2010 2011 2012 2013
June July August
11
External sector
Figure 29: Financial account (EUR mn)
Source: BNB, Raiffeisen RESEARCH
Figure 30: Net financial inflows by sectors,
cumulatively for January-August (EUR mn)
Source: BNB, Raiffeisen RESEARCH
intensified. In August their net value totalled to EUR 227.9 mn, posting an
improvement by EUR 103.5 mn compared to a year ago. Cumulatively for
January–August net transfers amounted to EUR 1.8 bn, growing dynamically on a
yearly basis (by 23.8%). Moreover, their annualized value for the last 12 months
reached EUR 2.4bn, thus exceeding the amount of net services, which used to be
the most significant contributor to the current account.
In August the capital account totalled to EUR 63.3 mn, mainly due to transfers from
the EU funds to the general government sector. Nevertheless, cumulatively from the
beginning of 2013 the balance of the capital account decreased by 11.8% on an
annual basis.
As a reflection to the current account, the financial account marked an untypically
high flow in August, but outgoing from the country (EUR -567.9 mn). The main part
of the outflow was on the back of investment other than direct and portfolio, whose
balance totalled to EUR -491.3 mn. In particular, it was due to an outflow of
currency and deposits, both on the account of banks’ foreign assets and foreign
currency and deposits in the country. Meanwhile, the size of FDI during the month
was negative (EUR -42.3 mn), which is manly related to repayment of liabilities to
foreign investors (by EUR 34.2 mn). Portfolio investments also had a negative
balance during the month: EUR - 34.4 mn.
Cumulatively from the beginning of the year the balance of the financial account
was also negative, totalling to EUR -1.7 bn. It marked a significant decrease
compared to the same period the previous year, when the balance was positive at
the amount of EUR 1.8 bn. One part of the change was due to the public sector: in
July 2012 a Eurobond emission of about EUR 1.0 bn was placed on the external
market (resulting in a financial inflow of EUR 701.25 mn), while in January 2013 a
maturing emission of similar value was repaid (leading to an outflow of EUR 300.4
mn).Nevertheless, the main part of the decrease of the financial account compared
to January – September 2012, of around EUR 2.6 bn, was on the account the
private sector, mostly because of an outflow of currency and deposits, as well as
due to a decline in FDI inflow to the country.
As a result of the presented developments, in August the balance of the current
account, capital and financial account totalled to EUR 379.9 mn. After adjusting
for errors and omissions6 of a significant amount, the balance of payments
amounted to EUR -129.2 mn and, respectively, BNB’s FX reserves stepped down
by the same value.
5 The rest of the emission was purchased by residents on the secondary market during the month.
6 Respectively, downward revisions of the components of the Balance of payments can be expected with
the following data releases
-1500
-1000
-500
0
500
1000
1500
I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII
2010 2011 2012 2013
Direct investment, net Portfolio investment, net
Other investment, net Financial account
-1500
-1000
-500
0
500
1000
1500
2012 2013
Privare sector General government
12
Key figures
Source: NSI, BNB, MoF, Raiffeisen RESEARCH
2009 2010 2011 2012 2013e 2014f
Real GDP (% yoy) -5,5 0,4 1,8 0,8 0,5 2,0
Nominal GDP (EUR bn) 34,9 36,1 38,5 39,7 40,5 42,0
Nominal GDP per capita (EUR) 4618 4804 5255 5447 5594 5849
Nominal GDP per capita (EUR at PPP) 10368 10762 11628 12074 12165 12440
Individual consumption (real, % yoy) -7,6 0,6 1,7 2,0 0,5 1,4
Government consumption (real, % yoy) -4,9 -0,5 0,3 -0,4 1,7 -0,8
Gross fixed capital formation (real, % yoy) -17,6 -18,3 -6,5 0,8 0,9 0,7
Exports of goods and services (real, % yoy) -11,2 14,7 12,3 -0,4 4,9 5,8
Imports of goods and services (real, % yoy) -21,0 2,4 8,8 3,7 2,2 5,2
Industrial output (% yoy) -18,3 2,0 5,8 -0,4 -2,0 4,0
Producer prices (avg, % yoy) -6,2 8,5 9,5 4,4 0,2 5,5
Consumer prices (avg, % yoy) 2,8 2,4 4,2 3,0 2,0 3,4
Consumer prices (eop, % yoy) 0,6 4,5 2,8 4,2 1,5 3,2
Average monthly gross wages (BGN) 609 648 686 758 795 826
Average gross wages ( % yoy) 11,8 6,4 5,8 10,5 2,3 3,9
Average monthly gross wages (EUR) 311 331 351 388 406 422
Average gross industrial wages ( % yoy) 9,7 10,5 6,6 9,7 4,9 5,1
Employed persons (LFS, thd, avg) 3254 3053 2965 2934 2919 2948
Employment (avg, % yoy) -3,2 -6,2 -2,9 -1,1 -0,5 1,0
Unemployment rate (avg, %) 6,8 10,2 11,2 12,3 12,5 12,0
General budget balance (% of GDP) -0,9 -4,0 -2,0 -0,5 -2,1 -1,8
Public debt (% of GDP) 14,6 16,2 16,3 18,5 17,8 19,4
Export of goods (EUR mn) 11699 15561 20264 20770 21905 22997
Import of goods (EUR mn) 15873 18325 22420 24230 24682 25862
Trade balance (EUR mn) -4174 -2764 -2156 -3460 -2777 -2866
Current account balance (EUR mn) -3116 -533 33 -521 385 197
Current account balance (% of GDP) -8,9 -1,5 0,1 -1,3 1,0 0,5
Net foreign direct investment (EUR mn) 2505 977 1213 1209 1417 1634
Net foreign direct investment (% of GDP) 7,2 2,7 3,1 3,0 3,5 3,9
Official FX reserves (EUR bn) 12,9 13,0 13,3 15,6 15,4 18,2
Official FX reserves (% of GDP) 37,0 36,1 34,7 39,2 38,1 43,3
Gross foreign debt (EUR bn) 37,8 37,0 36,3 37,6 37,0 37,5
Gross foreign debt (% of GDP) 108,3 102,7 94,3 94,9 91,4 89,2
EUR/BGN (eop) 1,96 1,96 1,96 1,96 1,96 1,96
EUR/BGN (avg) 1,96 1,96 1,96 1,96 1,96 1,96
USD/BGN (eop) 1,37 1,46 1,51 1,48 1,50 1,50
USD/BGN (avg) 1,40 1,47 1,41 1,52 1,49 1,50
EUR/USD (eop) 1,43 1,34 1,30 1,32 1,30 1,30
EUR/USD (avg) 1,39 1,33 1,39 1,29 1,31 1,30
Key interest rate (% avg) 2,0 0,2 0,2 0,1 0,2 0,2
3 month Sofibid (% avg) 4,1 2,3 2,0 1,0 0,5 1,1
10 year T-bond yield (% avg) 7,2 6,0 5,4 3,4 3,5 4,4
Ratings, long-term, foreign currency Current Outlook
S&P BBB stable
Moody's Baa2 stable
Fitch BBB- stable
Rating confirmed in December 2012
Rating upgraded in July 2011
Rating confirmed in July 2013
Comment
13
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