Bulgaria

Bulgaria’s economic prospects have deteriorated as a result of Russia’s invasion of Ukraine. The country’s economy is very export-oriented, including the export of services (tourism), which makes it vulnerable to external shocks. Moreover, prior to the war, Bulgaria was heavily dependent on natural-gas imports from Russia. As a result, it has been markedly impacted by the European energy crisis and EU trade sanctions against Russia. Following a strong post-Covid-19 recovery with +7.7% real GDP growth in 2021, economic activity in Bulgaria slowed down markedly in 2022-2023 amid surging inflation, higher interest rates, weakening external demand and deteriorating business confidence. The latter affected investment in particular, which dropped substantially in the last two years, while domestic fiscal stimulus was dialed down due to rising financing costs. Nonetheless, growth remained positive at around +1.8% in 2023 on the back of resilient private consumption, thanks to strong wage growth, and a positive contribution of net trade as imports contracted much sharper than exports. Going forward, we expect growth to accelerate gradually over 2024-2025 and stabilize thereafter. Consumer spending will remain robust, thanks to strengthening real wage growth and investment activity is set to rebound in the next two years, driven by lower interest rates and public investment, including NGEU funded projects. Meanwhile, Bulgarian exports should remain subdued owing to weak demand from the EU while imports will rebound more strongly so that the contribution of net trade will turn negative. Overall, we expect full-year real GDP to expand by around +2.2% in 2024 and +2.6% on average in 2025-2026.

We expect currency stability to be maintained but price stability will not be fully regained before 2025. Bulgaria’s currency board (BGN1.95583:EUR1) should remain stable since foreign exchange (FX) reserves continue to clearly cover the monetary base (a requirement for a currency board; currently at over 140%). However, the currency board largely neutralizes monetary policy, preventing its use to counter upward price pressures since 2021. Following an average 15.3% in 2022 and 9.6% in 2023, consumer price inflation has fallen to an average 2.7% y/y in the first eight months of 2024. We forecast it to remain above 2% over the next two years – which compares to an average 1.5% in the 2010s – owing to continued strong wage pressures and accelerating credit growth.

Bulgaria's business environment is adequate though spots of weaknesses remain. The World Bank Institute’s annual “Worldwide Governance Indicators” surveys suggest that the regulatory framework is generally business-friendly while weaknesses remain with regard to perceived corruption and the legal framework. The Heritage Foundation’s “Index of Economic Freedom” survey 2024 assigns Bulgaria rank 31 out of more than 180 economies, reflecting strong scores with regard to property rights, tax burden, business freedom and trade freedom. Weaknesses remain in the areas of judicial effectiveness and government integrity. On our proprietary “Environmental Sustainability Index”, Bulgaria is ranked 94th out of 210 economies, reflecting above average scores for energy use and CO2 emissions per GDP, water stress, as well as its exposure to climate events and its readiness to protect itself against such events. However, there are still weaknesses regarding renewable electricity output and the recycling rate.

Overall systemic political risk is moderate. Bulgaria is a democracy and has good international relations. It is a member of the EU and NATO and an OECD accession candidate. However, government instability has become a concern. Six parliamentary elections since 2021 have failed to produce a stable, lasting government. A seventh election has been scheduled for end-October 2024 but it is uncertain whether this one will be more successful. The absence of a stable government threatens to delay several policies, including Bulgaria's aim of joining the Eurozone in 2025, even though the main political parties are all committed to this goal.