Bulgaria stands well in the short term, but in the next few years it will have to handle serious challenges

Brexit will weaken the economic growth in the Eurozone and hence in Central and Eastern Europe. Bulgaria stands well in the short term with an expected economic growth of 3.2% for the current year and around 3% for the next. In the next few years, however, our country will have to overcome the challenges resulting from the demographic problems and the diminishing labour productivity. This is the forecast presented today before Bulgarian media by the Chief Economist of UniCredit for Central and Eastern Europe Lyubomir Mitov.

Here are the highlights of his analysis:

Brexit has changed the prospects before the global economy, the United Kingdom is heading for recession. The trade with the UK is not of crucial importance for the CEE, but it is of great significance for the Eurozone, which leads to considerable negative revision of the growth in the Eurozone. The GDP of the Eurozone will drop by nearly 0.7% by the end of 2017 in comparison with the scenario from before Brexit, i.e. it will be 1% instead of 1.7%. The export for the same period will go down by around 1.5%, the capital expenditure – by around 1.5 % too, and the individual consumption will decrease by 0.3-0.4%. Of importance for Bulgaria is not so much the import for the Eurozone, but the export for third countries, which are the main markets for much of our production.

The Eurozone does not have many options for reaction – to loosen the quantitative restrictions of its monetary policy and to print more money, but further decrease of the interest rates is not expected. We may witness an accelerated integration at an EU level in the field of security and in the defense policy. In the Eurozone, the integration concerning sensitive topics is on hold. The unfinished banking union means that the systems is vulnerable to shocks and the European Central Bank remains the ultimate front of defense. The main problem for the Eurozone after Brexit will be the political risk.

The influence of Brexit on the markets in Central and Eastern Europe is weak and will remain so. The situation, however, is different when it comes to economic growth. The small open CEE economies, among which Bulgaria as well, will feel the most the slowdown of the growth in the Eurozone and this will have its reflection on the GDP of the countries with a decrease of 0.1 – 0.2%. The effect will be stronger on the trade in the CEE countries – there will be a decrease by 1.2 – 1.3% of the GDP. Bulgaria is among the countries which can apply fiscal measures to limit the influence of Brexit on the economy due to the good implementation of the state budget. If the Bulgarian government does not spent the money until the end of this year, then in the next year it can increase the expenditures by 0.5% and thus stir the economy up and lessen the effect of Brexit on the GDP.

The growth of the Bulgarian economy is gaining momentum and becoming wider-based – it is no longer due only to export, but also to increase of the internal consumption. The expectations of UniCredit Research are that for 2016 our country will register an annual economic growth of 3.2% and in 2017 it will remain at 3%. This shows that the Bulgarian economy has gained momentum, on a background of a stagnating economy in the Eurozone at that. The export of Bulgaria has increased and the economy is becoming more and more competitive. In terms of export volumes, Bulgaria has a very good position among the CEE countries and manages to export goods and services that are much more than the

demand in the countries from the Eurozone. When, however, the export of goods and services is measured per capita, our country is next to the last, the last being Romania.

There is good news on the labour market in Bulgaria – after many years of high unemployment, now it is going down, at a fast pace at that. Many new jobs are being created and they are in sectors with high added value and high salaries. There is a shift of the country's economy from sectors such as low-paid tourism and construction to a more sustainable economic model. From a deficit in the balance of payments in previous years, Bulgaria is now generating a surplus on the current account. Part of this is due to the EU funds.

The external debt of the country is moderate and this has a positive effect on the risk premiums on government bonds.

The expectations keep improving, which is good for the business, the work environment and the investments. In the coming 1–2 years we can expect maintenance of the economic growth at the same levels. One of the factors which was until now a brake for the investments was the lack of trust in the future. This factor is gradually disappearing and this will lead also to some more activity in the field of lending.

Bulgaria is migrating to a growth model which does not lead to occurrence of new or exacerbation of existing macroeconomic disbalances.

In the short term Bulgaria stands well, but in the next few years it will have to handle serious challenges.

The expectations for the next 5 years for the entire CEE region are for a lasting decrease of the economic growth because of two factors – demography (decreasing workforce) and labour productivity (decreasing relative share of labour productivity as against the GDP). In the recent years the labour productivity was growing due to the reforms implemented in various sectors, the change of production technologies and the high level of foreign investments. In the coming years, however, we cannot expect an inflow of foreign capitals in the developing economies from the CEE region and that is why our country has to focus on its own internal possibilities for growth.

Bulgaria's population is decreasing at a fast pace – except for the negative demographic growth, this results also from the emigration of young and well educated Bulgarians. The Bulgarian woman gives birth to 1.5 children on average and even if this number is immediately increased to 3, the trend cannot be reversed in the next 20 years. Another aggravating factor on the labour market is that whereas in 2000 the people leaving the country were mostly poorly qualified Bulgarians, the emigrants in the recent years are people with better and better qualification. The so called "brain drain" is a problem for the entire CEE region and places it in a rather unfavourable position in the following years. The solution is in the immediate taking of measures for improvement of the demographic situation – creating opportunities for child raising in kindergartens and nurseries, possibility for the parents to go back to work soon, flexible working hours, as well as educational reforms aimed at moving away from the mechanical memorizing and towards development of education focused on the finding and analyzing of information, and also at restarting of vocational education.

For Lyubomir Mitov:

Lyubomir Mitov is Chief Economist of UniCredit Group for Central and Eastern Europe. Before starting his career at UniCredit, he was a chief economist for the emerging European markets in the Institute of International Finance in Washington, where he worked 18 years. Lyubomir Mitov held the positions of senior economist at the Representation of the World Bank in Bulgaria and the Ministry of External Economic Relations.

For further information: Identity and Communications Department, UniCredit Bulbank

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Mara Bareva, Phone: +359 2 9264 963, nbsb/cbsfwbAvojdsfejuhspvq/ch

Beatris Nikolova, Phone: +359 2 9232 528, cfbusjt/ojlpmpwbAvojdsfejuhspvq/ch