Slow Post-Pandemic Growth Set For Bulgaria

Fitch Solutions / Country Risk / Bulgaria / Wed 04 May, 2022

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Key View

  • We at Fitch Solutions expect Bulgaria’s economy to grow by just 2.5% in 2022 following 2021's growth of 4.2%.
  • Rising inflationary pressures owing to persistent supply-chain issues and an energy crunch that has worsened due to the Russia-Ukraine war, will continue to weigh on business and consumer sentiment in Bulgaria.
  • While fiscal measures should offset some of the price effects on household balance sheets, a large influx of Ukrainian refugees could stretch the government’s ability to support all sectors of the economy.

We at Fitch Solutions expect Bulgaria’s economy to grow by 2.5% in 2022, slowing from 4.2% in 2021. The Bulgarian economy showed resilience through 2021 despite continued troubles with the Covid-19 pandemic given the low vaccinate take-up in the country. In the final quarter of 2021, the economy grew by 5.6% year-on-year (y-o-y), marking the strongest annual rate of growth recorded in a quarter since the pandemic began. A combination of strong growth in household consumption (8.7% y-o-y and 8.0% quarter-on-quarter) and a positive net export contribution of 0.2 percentage points (pp) bolstered growth in the final quarter of 2021. In the year as a whole private consumption added 5.4pp to growth with net exports taking away 2.5pp from the annual growth rate given that imports grew by 12.2% on an annual average basis, faster than 9.9% growth recorded by exports.

Russia-Ukraine War Has Changed Bulgaria's Growth Outlook

Bulgaria - Real GDP Growth By Component, pp (2018-2023)

f = Fitch Solutions forecast. Source: Eurostat, Fitch Solutions

Looking ahead we expect the domestic and external dynamics to shift markedly in 2022 amid the worsening of the Russia-Ukraine conflict. Like most countries in the region, elevated price pressures and the negative impact on business and consumer sentiment, will be the main channel of transmission of the crisis into the Bulgarian economy. Additional stress to government finances may also emerge from the influx of Ukrainian refugees coming into Bulgaria which could in turn limit offsetting fiscal measures to ease price pressures for households. Tighter financial conditions in the second half 2022 as the European Central Bank looks to control rising inflation, will likely result in costlier credit in Bulgaria. This in turn will continue to weigh down gross fixed capital formation which contracted by 11.0% in 2021 as a whole.

Price Pressures Will Continue To Rise In The Short Term
Bulgaria – Consumer Price Inflation, % chg y-o-y (LHC) & Consumer Confidence Index (RHC)
Source: Eurostat, Fitch Solutions

We expect private consumption growth – the largest component of GDP – to slow to around 4.0% in 2022 from 8.0% in 2021. Consumer price inflation in Bulgaria started accelerating from the second half of 2021 as domestic demand recovered and supply chain disruptions caused by the pandemic, remained a constraining factor for goods availability. Rising price pressures have weighed on consumer sentiment as cost of living concerns continue to rise (see chart above). The invasion of Ukraine by Russia in February has intensified the supply chain issues and caused an energy crunch in the region. On April 26, Russia decided to cut-off gas supply to Bulgaria due to not receiving rouble denominated payments. While natural gas accounts for around 20.0% of Bulgaria’s energy generation and alternative source can be arranged for supply, Russia’s crucial position as a major supplier in the oil and gas market has led to the prices of both commodities rising by over 50.0% compared to pre-pandemic levels. Given these circumstances, we expect consumer price inflation to remain elevated throughout the year – our forecast is for consumer prices to rise by an average rate of 11.3% in 2022 as a whole from just 2.8% in 2021.

We expect government policies to only partially offset cost of living issues as fiscal spending is also required for the upkeep of refugees from Ukraine. We forecast government consumption growth of 5.3% in 2022 which is higher than 4.0% recorded in 2021. The government’s temporary freeze on regulated power prices ended in March with no new announcements on cost of living policies announced so far. While the budget for 2022 is the largest it has ever been and there will likely be an increase in expenditure in the mid-year review of the budget, the government has made it clear that some of the expenditure increase will be targeted towards the influx of Ukrainian refugees fleeing the war; to date, there are around 70,000 Ukrainian refugees in Bulgaria. The country has received EUR148.4mn from the European Union in aid of the refugee crisis culminating from the invasion.

Businesses Remain Cautious As Prices Rise

Bulgaria – Industrial Confidence Index & Components, Balance Of Responses

Source: Eurostat, Fitch Solutions

The government’s budgetary plans, will however, help boost gross capital formation given that the government hopes to double public investment to 5.8% of GDP. Accordingly, we expect gross fixed capital formation to grow by 3.0% in 2022, following the component’s full year contraction in 2021. We caution however that increased input prices, energy shortage and generally weak sentiment due to the Russia-Ukraine war will mean that downside risks to this component will stay elevated. Investments and business conditions suffered greatly in 2021 due to protracted political uncertainty caused by scheduled elections. With a more stable outlook for the government and reduced Covid-19 related restrictions (Bulgaria will lift all travel related measures on May 1) some tailwind to capital formation is likely to emerge over the coming months. It is worth noting that sentiment data has started to suggest that concerns around external demand are creeping into overall industrial confidence (see chart above) which has also impacted production expectations for the coming months.

Key Trade Partners Face Slower Growth In 2022
Bulgaria - Exports By Destination, % Of Total Vs Forecast Growth Differential, pp (2021-2022)
Source: IMF Direction Of Trade, Fitch Solutions

The external sector outlook for Bulgaria has dimmed amid slower growth in key export destinations such as Germany, Romania and Italy (see chart above). Accordingly, we expect exports to grow at a slower pace of 6.3% in 2022 compared to 9.9% in 2021. Import growth will also slow to 7.0% from 12.2% although in keeping with past trends, imports will rise at a slightly faster pace than exports. As a result, we expect net exports to remain negative, taking away 5.5pp from headline growth.

Risk to outlook

Risks to our Bulgarian growth outlook continue to point to the downside as the Russia-Ukraine war intensifies. For one, we are working with the assumption that an European Union wide gas embargo against Russia will not cause acute energy shortages on the continent. Were this to happen, productivity of industrial sectors will be severely impacted across the board. Moreover, a worsening of the refugee situation in Bulgaria could weigh on social stability as the economy struggles to support the new influx of individuals.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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