FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
BULGARIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
On May 16th the European Commission
issued its long-awaited report on Bulgaria's
readiness to join the European Union.
The report suggested that Bulgaria could
become an EU member on January 1st 2007,
but warned that greater efforts to reform the
judicial system and stamp out corruption
would be needed to ensure that Bulgaria
joins the EU next year. The mixed opinion in
the report means that the government will
remain under pressure to continue with
judicial reform this year, which will mitigate
the risk of a coalition collapse during the near
term. However, tensions between the BSP
and its largest partner in the coalition
government, the centrist SNM, are likely to
rise once EU membership is achieved, most
likely at the beginning of 2007. At the same
time, a popular new party led by Boiko
Borisov, the mayor of Sofia, the capital, could
agitate for early elections once the situation
regarding EU membership is resolved.
The government is therefore unlikely to
survive for the full parliamentary term.
The main economic policy challenge over the
medium term will be to ensure that rapid
growth in domestic demand does not
destabilise the economy by fuelling
unsustainable current account deficits and
putting pressure on the currency board
arrangement. In light of the constraints on
monetary policy imposed by the currency
board, this means that the burden of
restraining demand falls on fiscal policy, and,
in turn, accounts for recent concerns voiced
by the IMF over the government's plans to
target a smaller fiscal surplus in 2007.
The presence of the BSP in government
is likely to rule out any significant acceleration
in the pace of structural reform and
privatization this year. In mid-May the
government agreed with the IMF to extend
the current stand-by arrangement until March
2007, although the agreement will not contain
any performance criteria for the first quarter of
2007. The agreement will be Bulgaria's last
with the IMF.
Economic Performance
Average real GDP growth for 2005 as a
whole was 5.5%, driven by the rapid growth
of household consumption and capital
investment. Slower wage rises in the public
sector, higher inflation and the BNB's
restrictions on bank lending are forecast to
restrain the pace of domestic demand growth
in Capital spending will be supported by
foreign direct investment (FDI) and the
re-equipment of privatized firms, but tighter
borrowing conditions will see investment
expansion slow too in 2006-07. Bulgarian
exports are likely to benefit from faster
economic growth in the country's main
markets, although expansion in this area
will be held in check by the strengthening
euro. Real GDP growth is expected to fall to
4.6% this year, and to remain around the
same level in 2007, as domestic demand
growth drops back slightly and export growth
picks up.
Year-on-year inflation went up to 8% in the
first quarter of 2006, and stayed high in April.
Provided that wage increases are kept in
check, inflation should gradually fall back in
the second half of 2006. Slightly lower global
oil prices, in combination with stable indirect
taxes, should allow inflation to fall significantly
in 2007. However, if strong price growth
were to extend further into 2006, or if external
factors were to keep inflation higher in
2007 than currently expected, then the
government's chances of achieving its 2009
target for euro adoption–assuming that
Bulgaria is successful in joining the EU in
2007–would be damaged.
The currency board arrangement is expected
to remain in place with the lev staying
fixed to the euro at the current rate of
Lv1.95583:[euro]1. The weakness of the
euro for much of 2005 meant that the lev's
real effective exchange rate increased
only slightly last year. However, in line
with expectation for a weaker US dollar in
2006-07, and relatively high inflation in
Bulgaria, Bulgaria's real effective exchange
rate should appreciate by 4.3% in 2006 and
by 4 % in 2007. Risks to the lev's exchange
rate are low in the short term, but would rise
over the longer term if the current account
deficit were to widen further in 2006-07.*
* The Economist Intelligence Unit Ltd., June 2006
Consumer price inflation averaged 5% in
2005. Flooding last year triggered a rise in
food prices, and in early 2006 sharp
increases in excises on alcohol and tobacco
caused the prices of these goods to jump.
Key Information Contacts
Financial Supervision Commission www.fsc.bg
Central Depository www.cdad.bg
Bulgarian National Bank www.bnb.bg
Ministry of Finance www.minfin.government.bg
National Statistical Institute www.nsi.bg
2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
Services
Industry
Agriculture & forestry
30.4
60.3
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Private consumption
Public consumption
Gross fixed investment
Change in stocks
Exports of goods & services
Imports of goods & services
80
78.8
77.4
70
9.3
60.8
60
50
40
30
23.8
20
10
0
PAGE 66
9.8
4.2