The data for the first quarter of 2009 outline a worsening of the economic situation in the country. In April, the IMF's mission in Bulgaria ended, and at the beginning of May, the European Commission published its forecasts for the development of EU countries, including Bulgaria. The findings of both institutions on the state of the Bulgarian economy and its main problems are focused on the expectations of negative GDP growth, deterioration of the payment and fiscal balances, the need to reduce budget expenditures and maintain a comfortable level of the BNB's foreign exchange reserves, of which the stability of the monetary board directly depends.
According to the latest data of the National Statistical Institute, the Ministry of Finance and the BNB, from the beginning of the year until now, the key economic indicators mark the following developments:
· Capital flows to the region and to Bulgaria in particular are decreasing as a result of the global crisis and the risk associated with it. Along with the restriction of FDI, we are also witnessing a decrease in the financing of subsidiary banks by the parent banks, which leads to a contraction in credit growth. For the period January-March 2009, FDI in the country reached 646.6 million euros (1.9% of GDP) compared to 1202.1 million euros (3.5% of GDP) for the same period in 2008. In January-March 2009, FDI covered 59.9 % of the current account deficit against 60.7% for the period January-March 2008.
· Due to a decrease in the trade deficit and the deficit under the Services item in the period January-March 2009, the current account deficit continued to decrease. It reached EUR 1078.7 million (3.2% of GDP) with a deficit of EUR 1 million (980.1% of GDP) for the same period in 5.8. The IMF forecast for 2008 is for a reduction in the current account deficit for 2009 . to around 2009% of GDP, while that of the European Commission is for a reduction to 12% of GDP.
· Both the European Commission and the IMF expect weak external demand, limited FDI inflows, subdued lending and subdued domestic demand to shrink GDP. The IMF's forecasts for 2009 for a drop in GDP of around -3.5% are more pessimistic than those of the European Commission, which expects a drop in GDP of around -1.5%. The decline in industry gives grounds for pessimism. In March 2009, compared to the same month of 2008, it reached -17.1%, and only in the mining industry it was -23.8%. The manufacturing industry also recorded a drop of – 23.2%.
· The limitation of credit for the non-governmental sector has a negative effect on production and employment. In March 2009, it deepened its year-on-year growth slowdown to 24%. The same applies to credit for households, whose growth on an annual basis reached only 24.7% at significantly higher rates in the same month of the previous year. In the first quarter of 2009, the total amount of gross loans to enterprises and citizens grew by only 0.9%. The lack of bank lending to the economy is further exacerbated by the VAT refund issue we reported last month, which remains unresolved.
· The unemployment rate started to rise and reached 6.9% in March 2009, but still remains relatively moderate. Regardless of the optimism of Social Affairs Minister Emilia Maslarova, who stated that in the coming months unemployment will hover around 7%, the European Commission expects unemployment to reach at least 8% by the end of 2009. The most dynamic processes are in the processing industry, where employment decreased by 19 people, followed by trade, repair and financial and insurance services.
· Inflation, as measured by the period-average change in the Harmonized Index of Consumer Prices, decelerated further. In April this year it reached 3.8% against 5.4% in February 2009 and observed double digits until October 2008. The European Commission expects inflation to fall to 2009% by the end of 3.9, while the IMF predicts an even more sensitive decline to 1.5% , consistent with the Fund's more pessimistic forecast of the GDP contraction.
· At the end of March, we once again drew attention to the fact that the 2009 budget was calculated under an overly optimistic scenario for GDP growth, and in the current situation it is clear that it will not be able to rely on the planned revenues and surplus. As of the end of April 2009, the estimate for the annual non-fulfillment of the annual task of the central budget was -3979.84 million BGN, or the annual implementation for the 2009 Act was of the order of 79.88%. We also warned about the need to limit budget expenditures and extremely carefully spend funds from the Fiscal Reserve in the pre-election period. The IMF mission in Bulgaria, as well as the European Commission, emphasize the same problems. The forecasts of the European Commission and the IMF are that the budget deficit will reach between -0.5% (EC) and -1% (IMF) of GDP. Unfortunately, the Government has not yet taken measures in the recommended direction to limit budget expenditures.
· Back in March, we pointed out that the Monetary Board has a high reserve, which, however, began to decrease dangerously quickly. Added to the unfavorable fact that the negative general balance of payments undermines the BNB's reserve assets is the imprudent spending of the Fiscal Reserve, which participates in the formation of the currency reserve of the BNB's Issuance Department. The dangerously high expenditures of over BGN 4 billion from the Fiscal Reserve, which the Government made at the end of 2008 for infrastructures and pre-election social purposes, led to a rapid reduction of the BNB's reserves. The European Commission criticized the loosening of fiscal discipline, and the IMF recommended that the Fiscal Reserve be protected from erosion. Unfortunately, the Government has not yet taken measures to ensure that such costs will not be incurred in the future.
· According to BNB data for the first quarter of 2009, the banking system has a stable capital position, good liquidity and profitability and acceptable quality of assets. The balance sheet capital of the banking sector grew by 7.9% in the first quarter thanks to issued capital, revaluation reserves and the profit of credit institutions. At the end of March, the total capital adequacy of the system reached 16.5% compared to 14.9% at the end of 2008. The ratio of liquid assets remained at a good level of 20.7%. Regardless of the indicated good indicators for the stability of the banking system, the data from the end of March testify to progressive unfavorable dynamics. The increase in classified and overdue exposures continues, as well as the increase in set-aside provisions. The risk of an increase in the share of non-performing loans grows with the continued decline in real estate prices, combined with the decline in capital inflows and the contraction of production.
In the already proven worsening of the situation and in the context of the upcoming election campaign, KRIB appeals for the urgent implementation of the measures it proposed last month, which today it specifies and enriches with new recommendations:
· All major political forces to sign an agreement (pact) in which they undertake to preserve the currency legislation and the currency board and after the elections until the entry into the ERM-2 and the Eurozone, as well as to maintain macroeconomic stability and fiscal discipline. The KRIB Board of Directors decided that the organization should initiate the preparation of such a document and began consultations with the political parties for its agreement and signing.
· Immediate conclusion of an agreement with the IMF, the negotiation of which should be most closely coordinated with the European Commission; it will have a disciplining effect, strengthen confidence in Bulgaria's stability and help speed up the process of the country's convergence to the euro zone.
· Regulation of the spending of funds from the budget and the Fiscal Reserve (FR); determination of a threshold below which the FR deposited in the BNB should not fall, since it participates in the formation of the aggregate foreign exchange reserve of the Issue Management of the BNB.
· It is imperative to start a procedure for updating the state budget or to introduce a more conservative buffer for the implementation of expenses from 90 to 80%, in view of the reduced revenues in the budget. Introduction of strict restrictions on financing from the central budget of deficits in the budgets of other public institutions - municipalities, hospitals, etc. Suspension of subsidies for loss-making enterprises (BDZ EAD, Toplofikatsia Sofia AD, etc.) The suspension of Kremikovtsi is a good sign in this direction.
· Improving the risk management system in the National Revenue Agency and creating a "Golden Register" for faster VAT refunds to companies that are correct taxpayers. A first step in the construction of the register could be the provision of bank guarantees for legitimate companies, to which VAT will be refunded before the companies are inspected. The next step is to start building the actual register on this basis. At the same time, KRIB insists on the introduction of a deadline for VAT refunds and, in case of delay, payment of punitive interest by the state for the companies.
· Additional increase of the guaranteed minimum amount for bank deposits to 100 euros in accordance with the recommendations of the European Commission in order to maintain confidence in the banking system.
· Increasing the effectiveness and efficiency of the program for granting loans to small and medium-sized enterprises through the Bulgarian Development Bank. According to KRIB, at the moment approved lines for BGN 500 million to commercial banks above the drain have not yet been utilized.
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