Source: Economist (http://www.economist.com/countries/Bulgaria/)

Country briefing Bulgaria

Forecast Oct 9th 2007 From the Economist Intelligence Unit Source: Country Forecast

The government—consisting of the Bulgarian Socialist Party (BSP), the National Movement for Stability and Progress (NMSP, formerly known as the Simeon II National Movement) and the mainly ethnic Turkish Movement for Rights and Freedoms (MRF)—will struggle to maintain unity in 2008-09, given the low level of public support for the NMSP and the emergence of a new centre-right party, Citizens for European Development of Bulgaria (CEDB), under the guidance of Boiko Borisov, the popular mayor of the capital, Sofia. The centre-right NMSP is under pressure from some its members, and from Mr Borisov, to leave the ruling coalition. This pressure has increased following the party's poor performance in the election to the European Parliament in mid-2007, which was won by the CEDB. The Economist Intelligence Unit estimates real GDP growth in 2007 at 6.3%, and forecasts that it will come down to 6.2% in 2008, and to 5.8% in 2009. The average rate of inflation is forecast to decline to 6.2% in 2008 and to 4% in 2009, compared with 7.4% in 2007. Rapid import growth is expected to keep the current-account deficit high in 2006-09, and it is projected to reach over 18% of GDP in 2007.

Key changes from last update

Political outlook

Perhaps stung by its defeat in mid-year elections to the European Parliament, the BSP has announced new appointments to the justice, and economy and energy ministries. The opposition has been restructuring, and local elections in October will offer an insight into the effect that these changes have had on voters.

Economic policy outlook

The BSP is planning to reduce social security contributions, and is considering the introduction of a flat-tax system. Public attention is focused on holding the government to account for surging inflation.

Economic forecast

The sudden acceleration of consumer price inflation to 12% year on year in August has led us to revise up our estimate for average annual inflation in 2007 to 7.4%, from below 6% previously. Our 2008 forecast has also been raised, in line with the persistence of inflationary disturbances in Bulgaria.

Factsheet

Annual data 2006(a) Historical averages (%) 2002-06 Population (m) 7.6 Population growth -0.7 GDP (US$ bn; market 31.5(b) Real GDP growth 5.7 exchange rate) GDP (US$ bn; purchasing 77.6 Real domestic demand 8.6 power parity) growth GDP per head (US$; market 4,137 Inflation 5.3 exchange rate) GDP per head (US$; 10,181 Current-account balance -8.5 purchasing power parity) (% of GDP) Exchange rate (av) :US$ 1.56(b) FDI inflows (% of GDP) 12.3 (a) Economist Intelligence Unit estimates. (b) Actual.

Background: After a violent communist takeover, Bulgaria became a People's Republic in 1947. The communist regime collapsed in November 1989, but the Bulgarian Communist Party—renamed the Bulgarian Socialist Party (BSP)—won the country's first free election. The anti-communist Union of Democratic Forces (UDF) formed a government after the October 1991 election, but this was replaced in December 1992 by a technocratic government backed by the BSP and the mainly ethnic Turkish Movement for Rights and Freedoms (MRF). The December 1994 election returned the BSP to power, but a severe economic crisis in 1996-97 forced an early election in April 1997, which was won by a UDF-led centre-right coalition. The newly founded Simeon II National Movement (SNM) won the 2001 election and governed with the MRF until the June 2005 election. The BSP won the 2005 election, although it fell far short of winning an absolute parliamentary majority. After lengthy negotiations the BSP, the SNM and the MRF formed a governing coalition in August 2005.

Political structure: Bulgaria has a unicameral legislature. The 240-member National Assembly is constitutionally the highest state authority. Its members are elected by proportional representation. A new constitution was passed in July 1991. The head of state is a directly elected non-executive president, who has the power to delay legislation, but not to block it.

Policy issues: Following the 1996-97 economic crash, an IMF-backed currency board was introduced. The currency board is intended to continue until Bulgaria adopts the euro (probably in 2010-11). With domestic demand growing rapidly, fiscal policy will have to remain tight. Further reform of the judiciary and intensified efforts to combat corruption and organised crime will be needed if Bulgaria is to avoid the imposition of punitive restrictions on available EU funding.

Taxation: The rates of personal income tax are progressive, ranging from 20% to 24%. The rate of tax on company profits was reduced from 15% in 2006 to 10% in January 2007. Value-added tax (VAT) is levied at a single rate of 20%, although tourism packages sold abroad have a rate of 7%. Foreign trade: In 2006 exports of goods amounted to US$15.1bn and imports of goods to US$21.9bn. The current-account deficit was US$5bn (15.9% of GDP) in 2006, even higher than the US$3.3bn (12.4% of GDP) deficit recorded in 2005.

Major exports 2006 % of Major imports 2006 % of total total Other metals 14.5 Crude oil&natural gas 17.5 Clothing&footwear 13.7 Machinery&equipment 8.9 Iron&steel 7.5 Textiles 7.8 Chemicals, 5.2 Chemicals, 6.4 plastics&rubber plastics&rubber

Leading markets 2006 % of Leading suppliers 2006 % of total total Turkey 10.8 Germany 17.4 Italy 10.1 Russia 12.5 Germany 9.9 Italy 8.8 Greece 8.1 Turkey 6.1

Economic data

• Bulgaria joined the EU in January 2007, but the European Commission is taking a tough line by monitoring Bulgaria's progress in reforming the judiciary and fighting corruption under a post- accession"benchmarking"procedure. Bulgarians are facing greater restrictions on working abroad in the EU than those applied to countries in the previous wave of enlargement. • The government, formed by the Bulgarian Socialist Party (BSP), the National Movement for Stability and Progress (NMSP, formerly the Simeon II National Movement) and the mainly ethnic Turkish Movement for Rights and Freedoms (MRF), has held together mainly because of pressure from the EU to maintain the pace of reform in order to qualify for EU membership. The lack of policy cohesion between the BSP and the NMSP, other than on EU issues, raises the prospect of an early parliamentary election, most likely in 2008. • Growth in domestic demand will ease over the forecast period. This, together with the strength of the euro, will cause real GDP growth to slow from 6.3% in 2007 to an annual average of about 6% in 2008-09. Real GDP growth is forecast to slow to just above 4% by the end of the forecast period, as Bulgaria's poor demographic situation prevents faster economic expansion. • Increases in excise duty pushed up prices in 2006, and high food prices in mid-2007 should also keep average inflation high, but it likely to fall back to a moderate 4% by 2009, as disinflationary momentum builds. The Economist Intelligence Unit expects Bulgaria to adopt the euro in 2011 or 2012. The current-account deficit is expected to rise to above 18% of GDP in 2007. It is forecast to decline from 2008, as more moderate growth in domestic demand and lower oil prices lead to a slowdown in import growth. • As there is little scope for discretionary monetary policy under the currency board, excessive growth in domestic demand is the main economic risk. The BSP's desire to avoid a repeat of the 1996-97 economic crisis should ensure that fiscal policy remains cautious, although the size of the budget surplus is set to fall. However, if domestic demand were to grow more strongly than expected, an even more restrictive fiscal policy might be required. If this should prove politically impossible and the current-account deficit increases further, doubts could arise about the sustainability of the currency board.

Key indicators 2007 2008 2009 2010 2011 2012 Real GDP growth (%) 6.3 6.2 5.8 5.8 5.5 4.4 Consumer price inflation (av; %) 7.4 6.2 4.0 3.5 2.5 2.4 Budget balance (% of GDP) 3.7 2.5 2.1 2.0 1.7 1.6 Current-account balance (% of GDP) ---18.4 16.9 16.3 -14.1 -12.9 -12.1 Short-term central interest rate (av; %) 3.8 4.0 4.0 4.0 4.0 4.0 Exchange rate Lv:US$ (av) 1.44 1.42 1.48 1.53 1.55 1.55 Exchange rate Lv:€(av) 1.96 1.96 1.96 1.96 1.96 1.96

Political structure Oct 9th 2007 From the Economist Intelligence Unit Source: Country Report

Official name

Republic of Bulgaria

Legal system

Based on the constitution of July 1991

National legislature

Unicameral National Assembly of 240 members, elected by proportional representation. Following the June 2005 election, the Coalition for Bulgaria, led by the Bulgarian Socialist Party (BSP), is the largest parliamentary group, with 82 seats; the Simeon II National Movement (SNM) is the second-largest group, with 53 deputies; the Movement for Rights and Freedoms (MRF) has 34 seats; the United Democratic Forces (UtdDF) has 17 seats; Democrats for a Strong Bulgaria (DSB), 17 seats; the Ataka (Attack) coalition, 14 seats; the Bulgarian People's Union (BPU), 13 seats; and there are ten independent MPs

Electoral system

Universal direct suffrage from the age of 18

National elections

October 2006 (presidential) and June 25th 2005 (parliamentary); next presidential election due in October 2010, next parliamentary election due in June 2009

Head of state

Georgi Purvanov, re-elected president in October 2006

National government

A coalition between the Bulgarian Socialist Party (BSP), the Simeon II National Movement (SNM) and the Movement for Rights and Freedoms (MRF)

Main political parties and groupings

Bulgarian Socialist Party (BSP; previously the Bulgarian Communist Party); National Movement for Stability and Progress (NMSP, formerly the Simeon II National Movement centred on the former king, Simeon Saxe-Coburg); Movement for Rights and Freedoms (MRF, formed mainly from the Turkish ethnic minority); United Democratic Forces (UtdDF, an alliance of anti-communist parties and groups, including the Union of Democratic Forces/UDF); Democrats for a Strong Bulgaria (DSB, a party made of former members of the UDF); Bulgarian People's Union (BPU, a centre-right grouping, most of whose members were previously in the UDF); Ataka (Attack) coalition (a nationalist grouping that emerged just before the June 2005 parliamentary election); Citizens for European Development of Bulgaria (CEDB, formed in December 2006 and informally led by Boiko Borisov, the mayor of the capital, Sofia)

Council of ministers

Prime minister: Sergei Stanishev (BSP)

Deputy prime minister & foreign minister: Ivailo Kalfin (BSP)

Deputy prime minister & education & science minister: Daniel Valtchev (NMSP)

Deputy prime minister & minister for disaster management policy: Emel Etem (MRF)

Key ministers

Agriculture & forestry: Nihat Kabil (MRF)

Defence: Veselin Bliznakov (NMSP)

Economy & energy: Petar Dimitrov (NMSP)

European affairs: Gergana Grancharova (NMSP)

Finance: Plamen Oresharski (independent)

Interior: Rumen Petkov (BSP)

Justice: Miglena Tacheva (NMSP)

Labour & social policy: Emiliya Maslarova (BSP)

Regional development & public works: Asen Gagauzov (NMSP)

Public administration & administrative reform: Nikolay Vassilev (NMSP)

Economic structure Oct 9th 2007 From the Economist Intelligence Unit Source: Country Profile

2003(a) 2004(a) 2005(a) 2006(a) 2007(b) GDP at market prices (Lv bn) 34.5 38.3 41.9 49.1 57.1 GDP (US$ m) 19,974.3 24,331.3 26,718.6 31,516.7 39,607.8 Real GDP growth (%) 5.0 6.6 6.2 6.1 6.3 Consumer price inflation (av; 2.3 6.1 5.0 7.3 7.4 %)(c) Population (m) 7.8 7.7 7.7 7.6(b) 7.6 Exports of goods fob (US$ m) 7,081.4 9,931.2 11,776.4 15,064.1 19,709.4 Imports of goods fob (US$ m) 9,657.3 13,619.1 17,267.2 21,873.5 28,779.2 Current-account balance (US$ m) -1,022.2 -1,671.1 -3,304.7 -5,009.8 -7,272.6 Foreign-exchange reserves excl 6,291.0 8,776.0 8,040.5 10,965.0 12,949.9 gold (US$ m) Total external debt (US$ bn) 13.0 15.0 16.8 26.1(b) 33.9 Debt-service ratio, paid (%) 9.8 14.0 30.8 16.8(b) 19.1 Exchange rate (av) Lv:US$ 1.730 1.573 1.570 1.558 1.442 (a) Actual. (b) Economist Intelligence Unit estimates. (c) Non-seasonally adjusted.

Main origins of gross value % of Main components of gross domestic % of added 2006 total product 2006 total Agriculture&forestry 8.5 Private consumption 77.2 Industry 31.7 Public consumption 9.4 Services 60.0 Gross fixed investment 26.2 Change in stocks 5.7 Exports of goods&services 64.0 Imports of goods&services 83.0

Principal exports fob 2006 US$ m Principal imports cif 2006 US$ m Other metals 2,178 Crude oil&natural gas 4,078 Clothing&footwear 2,060 Machinery&equipment 2,080 Iron&steel 1,132 Textiles 1,806 Chemicals, plastics&rubber 790 Chemicals, plastics&rubber 1,489

Main destinations of exports % of Main origins of imports 2006 % of 2006 total total Turkey 10.8 Germany 17.4 Italy 10.1 Russia 12.5 Germany 9.9 Italy 8.8 Greece 8.1 Turkey 6.1