2024-04-15 08:53:10
Bulgaria’s economy slowed down in 2023 in sync with the trends of key trading partners. Inflation continues to slow, but the pace is slow and puts the country’s bid to join the eurozone in 2025 at risk. Real wage increases outpaced productivity growth in 2023, fueling concerns about competitiveness. The re-escalation of political uncertainty threatens the government’s reform agenda. This is stated in an analysis of the World Bank.
Basic conditions and challenges
Although Bulgaria is gradually approaching the average income in the EU, its development path remains uneven. By 2022, its GDP per capita reached 62.1 percent of the EU average per capita at purchasing power parity, but Bulgaria remains the poorest member state. In addition, institutional and governance weaknesses continue to impede the country’s faster growth and productivity development. Bulgaria managed to overcome the recent crises relatively well, not least thanks to timely fiscal support for households and businesses. Economic growth saw only a moderate decline in 2020, followed by a strong recovery in 2021-2022. The fiscal position remained strong despite increased discretionary spending in response to the shocks. The final deficit did not exceed the 3 percent mark in any of the years of the crisis, and public debt – at a projected 23.8 percent of GDP in 2023 – remains among the lowest in the EU.
In 2015-2020, Bulgaria’s economic growth improved the living standards of the middle and poorest 40 percent of households. These improvements led to a significant reduction in poverty over the period by 9.6 percentage points (using the US$6.85 poverty line). However, in 2021 this positive trend was reversed due to inflationary pressures and reduced employment rates among the unskilled. Comparatively, poverty levels remain relatively high by EU standards. Likewise, inequality in Bulgaria has been the highest in the EU for years, with a Gini coefficient of 40.8 in 2021.
Since the beginning of 2021, the country has suffered from political instability and lost the momentum of reforms. This was briefly interrupted by two short-lived regular governments that sought to increase efforts and meet key policy objectives, including milestones under the National Recovery and Resilience Plan. Yet renewed political turmoil threatens to throw the country back into the spiral of early elections with a diminished appetite for reform.
Speed of development
Despite stagnation in some of the key export markets, the Bulgarian economy managed to hold its own thanks to strong private consumption. However, economic growth slowed to 1.8 percent in 2023 as strong household consumption (+5.4 percent) and a reduced contribution from negative net exports accompanied stagnant government consumption and a decline in gross capital formation. The latter fell 18.1 percent due to a reduction in inventories built up in 2021-2022 and possibly the wariness of businesses to reinvest.
The slowdown in economic activity led to a moderate decline in employment in the second half of the year. Still, nominal wages continued to grow at a double-digit annual rate in 2023. Thus, real average wage growth approached 5 percent for 2023, outstripping labor productivity growth and fueling concerns about the country’s competitiveness .
Consumer price growth continued to slow in 2023 to reach 3.8 percent annually by January 2024. However, disinflation has been slow and average annual inflation reached a 15-year high of 9.5 percent in 2023 After the rapid deterioration of the fiscal position at the beginning of 2023, the balance sheet improved later in the year, as measures to strengthen revenue collection yielded results, BGNES reports.
World Bank projections show the fiscal deficit reaching 2.4 percent of GDP in 2023, or below the Maastricht ceiling of 3 percent. The current EC report on Bulgaria’s readiness to join the euro area is expected in June 2024. For now, inflation remains the only challenging Maastricht criterion for accession, but the gap between actual inflation rates and the reference line is narrowing rapidly. Poverty reduction (using the $6.85 poverty line) will slow in 2023 to 5.12 percent, mostly due to slower economic growth and still high food and energy prices, which have adversely affected of those whose nominal wages do not keep pace with inflation. The burden of energy costs varies across households due to different consumption patterns and energy needs, with single elderly households particularly affected.
Prospects
Economic growth is predicted to pick up in 2024-2025 with the expected recovery in the Eurozone. Bulgaria’s goal of joining the eurozone in 2025 may be difficult but not impossible to achieve if it has a stable government and the trend of disinflation continues in the coming months, as expected. Even if the banking sector remains stable and highly profitable (with a net profit of 64 percent in 2023), the continued credit expansion of the construction boom is fueling concerns about the build-up of a construction credit bubble. The latter may lead to a painful correction and increase in the future of non-performing loans, the amount of which was 3.63% at the end of 2023.
Credit growth remained almost flat at 12.4% y-o-y at end-2023 (vs. 12.7% at end-2022), with credit to households even accelerating to 15.9% from 14.6% at the end of 2022. Likewise, residential building permits continued to grow at double-digit rates in the final quarter of 2023.
Political risks have heightened again after a botched rotation of the prime ministership between the two partners in the ruling coalition that ousted the last regular government last month. The country is now heading for another round of snap elections – the sixth in about three years – that threaten to delay reforms in the short term and jeopardize the achievement of key policy goals such as eurozone membership. The government’s budget sets a (money basis) fiscal deficit of 3 percent for 2024 amid an ambitious capital spending program. Consolidation thus appears to be delayed beyond 2024. The current account is projected to maintain a slight surplus in 2024-2026 due to an expected downward adjustment in import prices of basic raw materials and an increase in net exports of services.