Bulgaria’s primary challenge lies with its pace of economic

recovery

Andrea Casini, COO of UniCredit Bulbank

Sofia, 01 July 2014

Prepared for the meeting of the EU Club to the Bulgarian Chamber of Commerce and Industry

Real GDP growth by components since the start of

the downturn, in % swda (1Q 2008 – 1Q 2014)

20.0

-1.1-2.2-2.2

-38.4

-60.0

-45.0

-30.0

-15.0

0.0

15.0

30.0

1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14

ExportGDP realPrivate ConsumptionImportFixed Investment

The longest period of sub-par growth in the modern history of the

country is not over

GDP growth and contribution to growth, yoy in %

swda (1Q 2009 – 1Q 2014)

Source: NSI, UniCredit Bulbank Economic Research

Note: Weaker export in 1Q14 seems mostly driven by one-off factors of technical nature, including terms of trade losses and reduced export of petroleum

products, as some of the production facilities of the oil refinery in Burgas are closed for planned renovation activities

-25

-20

-15

-10

-5

0

5

10

15

1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

Net Export

Fixed Investments

Public consumptionPrivate consumption

GDP, real growth

2

The shift toward less restrictive fiscal policy was a good news, but failure on the structural reforms front and especially in the energy

sector, on top of political instability and EU funds freezing were clear negatives

Abnormally subdued inflation and persistently high unemployment indicate that policy is too tight and the risk of too slow domestic

demand recovery remains largely neglected

To kick-start the economy, policy makers should consider a more active role for fiscal policy, including not only more investments in

infrastructure, but also in health care and education, which are crucial to boost the quality of the labor force

Contribution to CPI dynamics by components, in %

(Apr’2009 – Apr’2014)

We are not particularly worried that Bulgaria will plunge into a

classic self-perpetuating deflationary spiral

Inflation (CPI) by CEE countries, yoy, in %

(2012 – 2015f)

Source: Eurostat, NSI, UniCredit Research

3

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14

Core inflation Energy Foods CPY (yoy)

%

avg. eop avg. eop avg. eop avg. eop

Bulgaria 3.0 4.2 0.9 -1.6 -0.8 0.7 1.4 1.5

Croatia 3.4 4.7 2.2 0.3 0.5 1.8 1.6 1.2

Czech Republic 3.3 2.4 1.4 1.4 0.8 1.6 2.2 2.1

Hungary 5.7 5.0 1.6 0.4 0.5 2.0 3.0 3.6

Poland 3.7 2.4 0.9 0.7 0.4 0.8 2.2 2.1

Romania 3.3 5.0 4.0 1.6 1.7 3.0 3.3 3.3

Slovakia 3.6 3.2 1.4 0.4 0.2 1.0 1.8 2.0

Turkey 8.9 6.2 7.5 7.4 8.3 8.1 5.8 6.4

Russia 5.1 6.6 6.8 6.5 7.3 7.2 5.6 4.9

Ukraine 0.6 -0.2 -0.3 0.5 11.2 17.3 10.8 6.4

2012 2013 2014f 2015f

Recent CPI numbers provided evidence that the anticipated normalization in the inflation dynamic has started to materialize

Deflation is prompted by: 1) considerable slack in the economy and; 2) the pronounced impact of one-off factors, such as the cutbacks in

heating and electricity prices and externally-driven fall in food and energy costs

But while current deflationary pressure is more of a transitory phenomenon, low inflation is something that is going to stay with us for an

extended period of time

4

Labor market pain has eased recently, but adjustment is not over

Participation rate, labor force and population dynamics

(1Q 2005 – 1Q 2014)

Unemployment rate (1Q 2005 – 1Q 2014)

Source: Eurostat, NSI, UniCredit Bulbank Economic Research

Note: Participation rate is a ratio between labor force (which includes not only those who have jobs but also those who are actively searching for jobs) and

population.

-6%

-4%

-2%

0%

2%

4%

6%

60%

62%

64%

66%

68%

70%

72%

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

Participation rate aged 15-64, 12m MA (LS)

YoY change in labor force, 12m MA (RS)

YoY growth on population aged 15-64, 12m MA (RS)

(in %)

0.0

4.0

8.0

12.0

16.0

20.0

0

20

40

60

80

100

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

Youth unemployment (under 25s) (LS)Long-term unemployment in % of unemployment (LS)Unemployment rate (RS)

The worst in terms of jobs shedding is over and, albeit only very slowly, a job recovery will take hold from here

Labor market recovery is in its early stages and both youth (27.8%) and long-term unemployment (59.5%) still remain dangerously

elevated

All forecasts indicate that bringing unemployment rates down to levels consistent with full employment would need many years to

materialize

Bulgaria’s external position has seen a marked improvement

External merchandise trade developments, 12m MA

(Apr’2008 – Apr’2014)

Source: BNB, NSI, UniCredit Bulbank Economic Research

5

0.8%

-0.2%

-7.3%

-32%

-28%

-24%

-20%

-16%

-12%

-8%

-4%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Apr`08 Apr`09 Arp`10 Apr'11 Apr'12 Apr'13 Apr'14

Merchandise exports, yoy,12m MA (LS)

Merchandise imports, yoy, 12m MA (LS)

Merchandise trade balance, last 12m sum, % of GDP (RS)

Debt sustainability indicators (2009 – 2015f)

129 9 8 8 8 10

228

180

141 142

133 129 122108 103

94 95 93 92 87

0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2014f 2015f

Debt-service ratio (debt service payments-to-exports)Debt / Export ratioExternal Debt (incl. intercompany borrowing) / GDP

Debt/Export ratio Sustainability

threshold (150%)

Debt-Service ratio Sustainability

threshold (20%)

This was led by exports and public current transfers, due to better EU funds absorption

The solid improvement in the external position indicates that the downturn adjustment in economic activity is now over

Stronger external position was also reflected in the improvement of the country’s debt sustainability indicators, which is important as

foreign debt at 93% of GDP (in end-2013) is seen as relatively high for the standards of emerging market economies

6

Can Bulgaria turn its low public debt into an even stronger

advantage?

Source: Eurostat, NSI, MF, UniCredit Bulbank Economic Research

Public debt to GDP ratio in CEE countries

(2008 – 2013)

78

94

105 108103

94 95 93 92 87

0

25

50

75

100

125

150

0

20 000

40 000

60 000

80 000

100 000

2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f

(in

% o

f G

DP

)

(in

EU

R m

illi

on

)

Banking Sector External Debt (LHS)

Public Sector External Debt (LHS)

Private Sector External Debt (LHS)

Gros external debt / GDP (RHS)

Gross external debt by sectors (2006 – 2015f)

13

73

22

47

28 29

16 13

20

14

5

29

79

72

57 55

46

39 38 38

19

10

CEE (10) Hungary Slovenia Poland Slovakia CzechRep.

Lithuania Romania Latvia Bulgaria Estonia

2008 2013

Over-proportioned fear of a Greek style scenario deterred Bulgaria from using more decisively its low public debt advantage from 2008 to

2012

The fiscal impulse in 2013 (as deficit increased to 1.9% of GDP from 0.4% a year ago) helped economic recovery to gain some momentum

For us, more public sector investments needs to be encouraged, not only in infrastructure, but also in the underfinanced education and

health care sectors, which are crucial to reduce raising skewness in income distribution and address pressing demographic challenges that

Bulgaria faces

Relative share of FDI in Bulgaria by geographical

region, stock (2013)

Share of Bulgarian export and import with some

specific countries (2013)

Source: BNB, NSI, UniCredit Bulbank Economic Research

The economies of CEE, including Bulgaria are among the most exposed to spillover effects from the Crimea crisis, but as things stand the economic impact is likely to be limited

20.1%

14.2%

7.3%

5.4% 5.0% 4.8%

2.7% 2.6% 2.6% 2.5%

0.04%

19.2%

0%

5%

10%

15%

20%

25%

Net

herl

ands

Aus

tria

Gre

ece

UK

Ger

man

y

Russ

ia

USA

Fran

ce

Hun

gary

Spai

n

Ukr

aine

Off

shor

e zo

nes

2.6% 1.9%

8.7%

18.1%

2.0%

7.3%

0%

5%

10%

15%

20%

25%

30%

Russia Ukraine Italy

Relative share of Export Relative share of Import

13 1019 3 3

ranking

7

Impact through trade and investments channels would be rather small, as the outlook for Bulgarian export and investments will remain

determined by the developments in its key partner - EU region

Impact on tourist flows remains uncertain. Importantly, severe economic adjustment underway in Ukraine and to a lesser extent in

Russia may even prompt demand for cheaper tourist destinations to rise

South Stream project would be in fact frozen by EU, because it makes no sense to pour billions of euros to support Ukraine, while at

the same time allowing Russia to bypass Ukraine as a major hub for Gazprom’s natural gas supplies channeled to Europe. On the

positive side, this conflict may encourage Bulgaria (with some help from EU) to do more to lessen its dependence on Russian energy

Total installed capacity of PV and wind in CEE,

in per capita terms - MW/mn people (2004-2012)

Urgent policy shift is needed in the energy sector

Energy intensity of the economy, Bulgaria=100

(2012)

Source: Eurostat, UniCredit Bulbank Economic Research

8

0

50

100

150

200

250

2004 2011 2012

0.00

0.20

0.40

0.60

0.80

1.00

Bulgaria needs to rethink its energy strategy and define clear priorities which are backed by the major political players. The focus should

shift from more state support for adding new electricity generation capacities toward investing more public money to improve efficiency and

diversification of the sources of supply

Pricing decisions need to change. Price of electricity for the household sector should cover the corresponding production and distribution

costs, including investment costs which are needed to guarantee the security of electricity supplies. At the same time, the needs of the poor

should be addressed by increasing the subsidies and by improving the capacity of the administration to identify with a decent degree of

precisions those who are most in need to receive these subsidies

9

THANK YOU FOR YOUR ATTENTION!

10

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