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					                                                                                                  March, 2011


                                   Highlights

                                    In the last quarter of 2010 economic growth reached 3.1%. Both
                                    external and domestic demand contributed positively. GDP increased by
                                    0.2% for the whole year.

                                    Household consumption increased by 4.8% in nominal terms compared
                                    to the last quarter of 2009, but due to the inflation the volume of
                                    purchases increased by only 0.7%. The compensation of employees
                                    grew yoy, but the high unemployment and the still uncertain economic
                                    environment in the country hampered the recovery of consumption.

                                    In 2010 the economy savings registered a historical maximum – almost
                                    24% of GDP, while in 2007 they were under 9%. The ratio of national
                                    savings to investments reached 94.1%, which was the highest value for
                                    the last ten years.

                                    The expensive foods continued driving the inflation rate upwards, and in
                                    February it reached 1.2% compared to January. On a yearly basis the
                                    inflation rate was as high as 5.2%.

                                    Labour productivity growth registered a record-high value in the last
                                    quarter of 2010 – 7.8% yoy. For the whole 2010 the growth rate
                                    amounted to 6.4%.

                                    The February budget deficit was considerably lower than a year earlier –
                                    BGN 273.2 mn. The fiscal reserve shrank to BGN 5.1 bn, BGN 600 mn
                                    above the legally established minimum level.

                                    In February the loans to non-financial enterprises decreased by BGN
                                    149 mn, while the decline of the loans to households was minor – about
                                    BGN 6 mn. The deposits of non-financial enterprises decreased on a
Analysts:                           monthly basis by BGN 99 mn, and those of households increased by
Kaloyan Ganev, PhD                  BGN 191 mn.
Chief Economist
                                    Bad and restructured loans’ growth decelerated significantly – the
kaloyan.ganev@raiffeisen.bg
                                    increase was only BGN 31 mn in February. However, there is no
Hristiana Vidinova                  information what part of the overdue loans was being repaid or was
Senior Analyst                      written off.
hristiana.vidinova@raiffeisen.bg
                                    In January 2011 the C/A moved again to positive territory realizing a
                                    surplus of EUR 155.5 mn. The trade balance was again the main positive
                                    contributor.

                                    Similarly to the first months of 2010, in January there was a net financial
                                    account outflow caused by the banking sector, at the amount of EUR
                                    610.6 mn.


                                                                                                             1
   Real Sector

GDP growth accelerated БВП in Q4 2010
due to the increase of domestic demand


Figure 1: GVA and GDP (yoy real growth, %)                                                                                                           Economic growth accelerated to 3.1% in Q4 2010 and thus
   4.0
                                                                                                                                                     GDP increased by 0.2%1 for the whole year.
   2.0
   0.0
   -2.0                                                                                                                                              In 2010 GDP amounted to BGN 70.5 bn and only slightly
   -4.0                                                                                                                                              exceeded our forecast for BGN 70.3 bn. In real terms, the
                                                                                                                                                     accounted volume was identical to our forecast (BGN 40.8 bn at
   -6.0
   -8.0
 -10.0                                                                                                                                               average 2000 prices). Real yoy growth was 0.2% as compared
                      I               II              III             IV                    I           II                   III           IV
                                                                                                                                                     to the 0.2% decline envisaged in our outlook. The difference was
                                                                                                                                                     entirely stemming from the revision of the 2009 GDP data,
                                             2009                                                                2010

                                                                    GVA                GDP                                                                              2
                                                                                                                                                     undergone by NSI.
                                                        Source: NSI, Raiffeisen RESEARCH
Figure 2: GVA by sectors (yoy real growth, %))                                                                                                       In the last quarter of 2010 the gross value added (GVA) in the
  50.0                                                                                                                                               economy advanced by 2.2%, which was mainly based on the
  40.0                                                                                                                                               favourable development of the industrial sector. For a second
  30.0                                                                                                                                               consecutive quarter the adjustments (taxes less subsidies on
  20.0
                                                                                                                                                     products) realized real growth yoy and therefore had a positive
  10.0
                                                                                                                                                     contribution to the 3.1% GDP growth. For the whole 2010 gross
   0.0
                                                                                                                                                     value added stepped up by 0.2%.
 -10.0

 -20.0
                  I            II          III    IV            I          II         III         IV         I          II         III      IV
                                                                                                                                                     The development of the industrial sector was the main reason for
              Agriculture                        Industry                  Services                    Adjustment                        GDP
                                                                                                                                                     the pickup of GVA in the last three months of 2010. The volume
                                                                                                                                                     of industrial production has been realizing positive yoy growth
                                                        Source: NSI, Raiffeisen RESEARCH
Figure 3: Construction production (yoy growth,
                                                                                                                                                     rates since Q2 2010, mainly stemming from the recovery of the
%)                                                                                                                                                   manufacturing. In Q4 2010 the gross value added of the
 50.0                                                                                                                                                industrial sector (excl. construction) expanded by over 10% yoy,
 40.0
 30.0
                                                                                                                                                     as compared to 0.3% decline for the first nine months of 2010.
 20.0                                                                                                                                                Therefore, a 2.3% real growth was registered in this sector for
 10.0
  0.0                                                                                                                                                the whole year.
-10.0

                                                                                                                                                     Construction was strongly negatively influenced by the recession
-20.0
-30.0
-40.0
              I            II          III       IV         I             II          III         IV         I          II         III          IV
                                                                                                                                                     in the country as in 2009 construction production decreased by
                                                                                                                                                     35% and the volume of gross value added shrank by 12%. For
                                2008                                           2009                                          2010
                  Consrtuction - total                              Building construction                               Civil engineering
                                                                                                                                                     the first nine months of 2010 the downward trend continued but
                                                                                                                                                     at diminishing rates. In Q4 2010 the recovery of this industry
                                                        Source: NSI, Raiffeisen RESEARCH
                                                                                                                                                     started as its gross value added picked up by 8.5% vs. the same
Figure 4: Industrial production (yoy growth, %)
 20.0
                                                                                                                                                     period of 2009, despite the fact that construction production
 15.0                                                                                                                                                continued falling. This means that the decline of intermediate
 10.0
  5.0
                                                                                                                                                     consumption in the sector must have been more pronounced than
  0.0                                                                                                                                                that of production in order to allow for an increase of GVA.
 -5.0
-10.0
                                                                                                                                                     The total area for new construction for which permits were issued
                                                                                                                                                     in Q4 2010 remained 21% smaller yoy, and therefore a
-15.0
-20.0
-25.0                                                                                                                                                rebound of construction production is not envisaged in the short
-30.0
          І               ІІ          ІІІ        ІV         І             ІІ          ІІІ         ІV         І          ІІ           ІІІ        ІV
                                                                                                                                                     term.
                               2008                                            2009                                           2010
                      Mining                                                                    Manufacturing
                                                                                                                                                     1
                      Electricity, gas and air condit. supply                                   Industry - total                                      The analysis is based on the seasonally unadjusted data on GDP and yoy real
                                                        Source: NSI, Raiffeisen RESEARCH                                                             growth rates.
                                                                                                                                                     2
                                                                                                                                                         Due to the revision GDP decline in 2009 increased from 4.9 to 5.5%.



                                                                                                                                                                                                                               2
   Real Sector

Figure 5: Services turnover (yoy growth, %)                                                          In the second half of 2010 the gross value added of the services
                                                                                                     sector was fluctuating around the volume in the corresponding
  40.0
  30.0                                                                                               period of the previous year. In Q4 the sector reported a minor
  20.0
  10.0
                                                                                                     real decline – 1% yoy. Financial intermediation, real estate and
   0.0                                                                                               business services demonstrated positive development. This
 -10.0
 -20.0                                                                                               subsector started recovering in Q2 2010 and its pace of
 -30.0
 -40.0                                                                                               advance reached 6% in the last quarter of the year. A decline or
              І        ІІ      ІІІ   IV     І     ІІ       ІІІ      IV      І      ІІ    ІІІ    IV   circa 5% was registered on average for the rest of the services.
                            2008                   2009                             2010

         IT services          Business services        Transport, storage and communications
                                                                                                     In the end of 2010 agriculture demonstrated the most negative
                                                                                                     dynamics among the three economic sectors. Whereas in the first
                                                                                                     nine months of 2010 it was realizing positive growth and was
                                          Source: NSI, Raiffeisen RESEARCH
                                                                                                     contributing to the export augmentation, in the last quarter of the
                                                                                                     year GVA of the agriculture sector shrank by 12.5% yoy.
                                                                                                     Nevertheless, for the whole year it stepped up by almost 4%.

                                                                                                     On the final use side, in the last quarter of 2010 positive
                                                                                                     contribution to GDP growth was brought by both the external
                                                                                                     and the domestic demand. In Q4 2010 NSI registered a
                                                                                                     rebound in real terms of 1.6% yoy of the domestic demand, after
                                                                                                     it had been falling since the beginning of 2009. The negative
Figure 6: GDP by final use components ( yoy                                                          balance on the external sector contracted by real 6.7%
real growth, % )
                                                                                                     compared to the same period of the previous year.
 40.0

 30.0
                                                                                                     Export of goods and services continued its rapid advance. In the
 20.0
                                                                                                     last quarter of 2010 it realized positive growth of near 16%, vs.
 10.0
                                                                                                     16.4% yoy growth for the first nine months of the year. Export of
   0.0
                                                                                                     goods, which started recovering in Q4 2009, was stepping up
 -10.0
                                                                                                     by double-digit rates during the whole 2010 (about 20% in the
 -20.0
                                                                                                     last quarter). Export of services, although with certain lag
 -30.0
                                                                                                     compared to export of goods, started picking up in the middle of
 -40.0
                                                                                                     2010. In Q4 it increased by 10.2% in real terms compared to
             I         II      III   IV     I     II       III      IV      I      II    III    IV   the same period of 2009.
                  Final consumption                              Investment in fixed capital
                  Export of goods and services                   Import of goods and services
                                                                                                     The real growth rate of import, which turned to positive territory
                  GDP
                                                                                                     in Q2 2010, accelerated significantly by the end of the year and
                                          Source: NSI, Raiffeisen RESEARCH                           reached 10.7%. Import of goods was stepping up yoy during the
                                                                                                     whole year and in Q4 2010 its pace was 12.3% yoy. After
                                                                                                     declining for the whole period since the end of 2008, in the last
                                                                                                     three months of 2010 import of services started recovering (5.4%
                                                                                                     yoy real growth). The dynamics of imports was connected to the
                                                                                                     demand for raw materials by the export-oriented industries and
                                                                                                     the rebound of the domestic demand.

                                                                                                     Final consumption realized a modest positive growth rate in Q4
                                                                                                     2010 – 1% yoy in real terms. Among its components, the most
                                                                                                     rapid pace of expansion was registered in the individual
                                                                                                     consumption of the government – 3.6%




                                                                                                                                                                      3
       Real Sector

                                                                                                             The high unemployment and still uncertain economic condition in
Figure   7:    Financing                                               of          households’               the country hinders the recovery of private consumption. In Q4
consumption (BGN mn)                                                                                         2010 the compensation of employees for the total economy
                                                                                                             increased in nominal terms by 1% on an annual basis. If this
                                                                                                             indicator improves in 2011 there will be a boosting stimulus for
  12 000
  10 000
   8 000
                                                                             income from abroad              the rebound of consumption. The rate of growth of mixed income
   6 000                                                                     compensation of                 and gross operating surplus (profits of companies and self-
                                                                                                             employed persons) accelerated to 17% in the last three months of
   4 000                                                                     employees

   2 000                                                                     social benefits from the

            0
                                                                             budget                          2010. However, it is not clear what part of it was transferred as
  -2 000
                                                                             gross operating
                                                                             surplus/mixed income            income to households and therefore, its effect on household
  -4 000                                                                     credits-deposits, net           consumption cannot be determined.
                    Q1    Q2     Q3   Q4     Q1     Q2   Q3      Q4

                           2009                      2010
                                                                                                             The transfers to households from the budget also increased in Q4
                                                                                                             2010 (8.2% yoy) as a result of the deteriorated conditions on the
                         Source: NSI, BNB, MoF, Raiffeisen RESEARCH
                                                                                                             labour market and the payment of compensations for
                                                                                                             unemployment and other social expenditures by the government.

                                                                                                             The disposable financial resources of households for consumer
                                                                                                             expenditures decreased during the quarter, as the total amount
                                                                                                             of consumer loans decreased by BGN 132 mn and also BGN
                                                                                                             1.4 bn were put in deposits. As a result, in Q4 2010 the
Figure 8: Savings (% of GDP, annualized)
                                                                                                             consumption of households increased by 4.8% yoy in nominal
24.0                                                                                                         terms. Due to the accelerated inflation in the last months of the
22.0
                                                                                                             year, the real volume of household consumption increased only
20.0
                                                                                                             marginally – 0.7% on an annual basis. For the whole year it
18.0
                                                                                                             remained smaller in real terms compared to 2009, stemming
                                                                                                             from its negative dynamics during the first nine months of 2010.
16.0

14.0

12.0
                                                                                                             As a result of the decline of final consumption and the positive
                                                                                                             growth of gross disposable national income, in 2010 savings in
10.0

 8.0
           I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV   the economy reached a historical peak – almost 24% as
             2003         2004        2005        2006          2007        2008       2009      2010
                                                                                                             compared to below 9% in 2007.
                                  Source: NSI,BNB, Raiffeisen RESEARCH
                                                                                                             In Q4 2010 certain recovery of the investment activity was
                                                                                                             registered. Because of the recession in the country, investment fell
                                                                                                             by 24-25% in 2009 and by similar rate in the first nine months of
                                                                                                             2010. Due to the improving macroeconomic conditions in the
Figure 9: Saving-investment balance (% of                                                                    country and the expectations for accelerated economic recovery
GDP, annualized)
                                                                                                             in 2011, in the last months of 2010 the investment dynamics
  40                                                                                                         turned positive. The volume of total investment stepped up by
  35                                                                                                         3.4% and that of gross fixed capital formation – by 3.2%.
  30                                                                                                         However, consideration should be given to the fact that a
  25                                                                                                         significant part of this increase was stemming from the public
  20
  15
                                                                                                             capital expenditures, which were doubled in nominal terms in
  10
                                                                                                             Q4 2010 vs. Q4 2009.
       5
       0                                                                                                     As a result of the higher savings and limited expenditures on
                I    II III IV        I      II III IV      I      II III IV       I    II III IV            investment in 2010, the coverage of investments by national
                     2007                    2008                  2009                 2010
                                                                                                             savings reached 94.4% which is the highest rate for the last 10
                                                                                                             years. It reflected the C/A deficit which was limited to 1% of
                           C/A deficit                Investment                    Saving
                                                                                                             GDP in 2010.
                                  Source: NSI,BNB, Raiffeisen RESEARCH




                                                                                                                                                                               4
   Inflation and labor market

Expensive foods continue driving inflation upwards
Labour productivity with a record-high increase in 2010
Figure 10: Inflation rate (% mom)                                                                                In February 2011 the national CPI inflation was 1.2% compared
 1.5%
                                                                                                                 to January 2011, by 0.1 p.p. higher than our forecast. This has
 1.0%
                                                                                                                 been also the highest monthly inflation rate since July 2008. The
                                                                                                                 increases in food prices continued determining almost entirely the
 0.5%
                                                                                                                 price level increase in the country. The prices of vegetables
                                                                                                                 increased by 10%, a similar increase was observed for sugar,
 0.0%

-0.5%
                                                                                                                 jams, honey, chocolate and sugar products – 10.5%. The price
-1.0%                                                                                                            increase for bread was 3.5% for the last reported month, and for
-1.5%                                                                                                            fats and oils it was 4.4%. On a yearly basis the inflation rate in
            I      III          V     VII        IX        XI        I    III    V     VII   IX      XI   I
                                                                                                                 the country was 5.2%, also by 0.1 p.p. higher than our forecast.
                                    2009                                             2010                 2011
                   Inflation                Seasonally adj. inflation, 12-month moving average
                                                                                                                 Of it 2.3 p.p. were due to the dynamics of food and non-
                                                                                                                 alcoholic beverages prices, and 1.3 p.p. were due to alcoholic
                                                     Source: NSI, Raiffeisen RESEARCH                            beverages and tobacco products. The contribution of the foods
                                                                                                                 group to the February inflation rate was 1.1 p.p., and the
                                                                                                                 remaining 0.1 p.p. were due to the non-foods group. The
Figure 11: Inflation rate (% avg)                                                                                contributions of catering and services were practically zero. The
14%
                                                                                                                 situation with the contributions of those groups from the
12%
                                                                                                                 beginning of the year was similar – the cumulative inflation for
                                                                                                                 January and February 2011 was 1.9%, and 1.7 p.p. were due
10%
                                                                                                                 to the foods.
 8%

 6%
                                                                                                                 According to the HICP the inflation rate in February was 0.6%
 4%
                                                                                                                 compared to January 2011. Compared to February 2010 it was
 2%
                                                                                                                 4.6%, and the annual average inflation rate for the last 12
 0%                                                                                                              months was 3.5%.
        I        III        V        VII        IX     XI        I       III    V      VII   IX     XI    I

                                2009                                                 2010                 2011
                                                                                                                 By the national CPI, our expectations for the March inflation rate
                                                                                                                 are for 0.4% mom, 5.4% yoy, and 3.5% annual average
                                                     Source: NSI, Raiffeisen RESEARCH
                                                                                                                 inflation. The forecast slowdown of the inflation rate is based on
                                                                                                                 our assessment for stabilizing international energy prices and
                                                                                                                 purely seasonal effects.


Figure 12: Labour productivity (% yoy)
                                                                                                                 The decline in employment and the GDP growth in Q4 2010 led
10%

 8%
                                                                                                                 to a high rate of labour productivity growth vis-a-vis Q4 2009 –
 6%
                                                                                                                 7.8%. For the whole 2010 labour productivity increased by
 4%                                                                                                              6.4%.
 2%

 0%
                                                                                                                 According to the statistics of the Employment Agency, in
 -2%
                                                                                                                 February a pause in the process of unemployment increase was
 -4%                                                                                                             observed. The number of registered unemployed persons for the
 -6%                                                                                                             same month was 362 370, and the unemployment rate was
            Q1         Q2       Q3         Q4         Q1        Q2       Q3     Q4     Q1    Q2      Q3   Q4
                                                                                                                 9.78%. Nevertheless, still no claim can be made that there was
                         2008                                    2009                             2010
                                                                                                                 a reversal of trends in the labour market. It is possible that the
                                                     Source: NSI, Raiffeisen RESEARCH                            decline of employment continues with a view to the continuing
                                                                                                                 hardship that has been undergoing the sector of the SMEs which
                                                                                                                 constitute over 99% of all enterprises in the country.




                                                                                                                                                                                 5
  Fiscal Sector

Significantly lower budget deficit than last February
The fiscal reserve stood at BGN 5.1 bn
Figure 13: Consolidated budget cash balance                                 The February budget deficit amounted to BGN 273.2 mn. It
(BGN mn)
                                                                            stemmed from a national budget deficit of BGN 401.5 mn and a
   1 000                                                                    surplus of EU funds of BGN 128.4 mn. Compared to February
     500                                                                    2010 the deficit decreased by BGN 647.6 mn due to cuts in
       0                                                                    expenditures and to a lesser extent to increased revenues.
    -500                                                                    Revenues and grants amounted to BGN 3.3 bn, while a year
   -1 000                                                                   earlier they were BGN 3.1 bn (an increase of BGN 205.1 mn,
   -1 500                                                                   or 6.6%). Tax revenue amounted to BGN 2.8 bn, increasing by
   -2 000                                                                   BGN 149.8 mn (5.7%) compared to February 2010. Non-tax
               Monthly balance, 2010             Monthly balance, 2011
                                                                            revenue increased by BGN 10.8 mn (2.4%) and reached BGN
               Cumulative balance, 2010          Cumulative balance, 2011
                                                                            471.7 mn. Grants totalled to BGN 76 mn, increasing by BGN
                                          Source: Ministry of Finance
                                                                            44.5 mn compared to 12 months earlier (141.3%).

Figure 14: Cumulative revenues (BGN mn)                                     In February 2011 consolidated budget expenditures were BGN
   3 500
                                                                            3.8 bn. Compared to last February they decreased by BGN
   3 000
                                                                            439.8 mn (10.3%). Subsidies and capital expenditure were the
   2 500
                                                                            two items which determined the decrease of total expenditures
   2 000
                                                                            during that month. The former fell by BGN 208.4 mn (62.5%)
   1 500
                                                                            yoy, and the latter – by BGN 175.2 mn (41.1%). Wages and
   1 000
                                                                            salaries decreased by BGN 48.2 mn (7.3%), while social and
    500
                                                                            health insurance contributions increased by BGN 1.9 mn (1.2%).
       0                                                                    While the increase in wages can be explained by the payments
                 January
                                2010      2011
                                                           February
                                                                            of compensations to laid-off civil servants last year (this effect will
                                                                            probably continue in the following months), the increase in
                                          Source: Ministry of Finance       social and health insurance contributions was due to the increase
Figure 15: Cumulative expenditures (BGN mn)
                                                                            in the social security burden by 1.8 p.p. from the beginning of
                                                                            2011. Interest expenditure in February 2011 was BGN 254.9
   4 500
                                                                            mn (more than 2/3 of them were on external loans). Compared
   4 000

   3 500
                                                                            to February 2010 it increased by BGN 17.1 mn. Social
   3 000                                                                    expenditure increased by only BGN 8.4 mn yoy, and this
   2 500
                                                                            probably was due to the expiration of the period in which
   2 000

   1 500
                                                                            workers who were laid-off could receive 60% of their insurable
   1 000                                                                    income as unemployment compensation. The part of the
    500
                                                                            Bulgarian contribution to the EU budget was BGN 151.3 mn as
       0
                 January                                   February         of February 2011.
                                2010      2011


                                                                            As of 28 February 2011 the fiscal reserve of the government
                                          Source: Ministry of Finance
                                                                            amounted to BGN 5.1 bn. Compared to the end of January it
Figure 16: Fiscal reserve (BGN mn)                                          decreased by BGN 340.1 mn. With a view to the target value of
   10 000
                                                                            BGN 4.5 bn of the fiscal reserve set for the end of 2011, the
    9 000                                                                   government has at its disposal about BGN 600 mn remaining to
    8 000
    7 000
                                                                            finance its deficit until the end of the year. Having in mind that
    6 000                                                                   the programmed deficit for the whole year amounts to about
    5 000
    4 000
                                                                            BGN 2 bn, this implies a necessity for a positive net financing of
    3 000                                                                   about BGN 500 mn from the debt markets, and this amount
                                                                            could increase taking into account the deficit of BGN 750.5 mn
    2 000
    1 000
           0                                                                accumulated only for the first two months of 2011.


                                          Source: Ministry of Finance




                                                                                                                                                 6
  Monetary Sector

No considerable changes in the behaviour of depositors and creditors
Bad and restructured loans’ growth decelerates
Figure 17: Contributions to M3 growth (p.p.)                                                                                                                                                         In February the annual rate of growth of M3 decelerated to 5.9%
   15%                                                                                                                                                                                               (7.1% in January). The largest contribution to this growth rate
   10%                                                                                                                                                                                               (5.1 p.p.) came from deposits with agreed maturity up to 2 years
    5%
                                                                                                                                                                                                     which increased by 9.6%. The deposits redeemable at notice up
    0%
                                                                                                                                                                                                     to 3 months increased by 9.7% (a contribution of 0.8 p.p.). For
    -5%
                                                                                                                                                                                                     money outside banks the growth rate was 2.1% (a contribution
                                                                                                                                                                                                     of 0.3 p.p.). The same contribution, but of the opposite sign,
   -10%
                                                                                                                                                                                                     came from overnight deposits which decreased by 1.4% (it was
                     Money outside banks                                                                                        Overnight deposits
                                                                                                                                                                                                     due to FX-denominated overnight deposits). Compared to
                     Deposits w/ maturity up to 2 years
                     Broad money M3
                                                                                                                                Deposits red. at notice up to 3 months
                                                                                                                                                                                                     January 2011 M3 increased by BGN 472 mn (0.9%). Money
                                                                                                                                                                                                     outside banks decreased by BGN 87 mn (1.2%), and overnight
                                                                          Source: BNB, Raiffeisen RESEARCH
                                                                                                                                                                                                     deposits increased by BGN 386 mn (3.5%). Deposits with
Figure 18: FX coverage of monetary base and                                                                                                                                                          agreed maturity up to 2 years increased by BGN 126 mn
M3 (%)                                                                                                                                                                                               (0.4%), and deposits redeemable at notice up to 3 months
   210%                                                                                                                                                                                    70.0%     increased by BGN 44 mn (1%).
   200%                                                                                                                                                                                    60.0%

                                                                                                                                                                                           50.0%
                                                                                                                                                                                                     As of 28 February 2011 the FX reserves of the country amounted
   190%
                                                                                                                                                                                           40.0%     to EUR 12.3 bn. They covered about 179% of the monetary base
                                                                                                                                                                                                     (a minimum of 100% required) and 47% of M3. Compared to
   180%
                                                                                                                                                                                           30.0%


                                                                                                                                                                                                     January, the FX reserves increased by EUR 106 mn despite the
   170%
                                                                                                                                                                                           20.0%

   160%                                                                                                                                                                                    10.0%
                                                                                                                                                                                                     decline in the government deposit by BGN 367 mn.
   150%                                                                                                                                                                                    0.0%


                                                                                                                                                                                                     The net foreign assets of the banks improved in February by
                                                                                                                                                                                                     BGN 1.5 bn yoy. The improvement was entirely due to the
                                                           FX reserves/ Monetary base                                  FX reserves/ M3 (rhs)




                                                                          Source: BNB, Raiffeisen RESEARCH                                                                                           decrease of their liabilities since the increase of their foreign
                                                                                                                                                                                                     assets was only BGN 27 mn. On a monthly basis the net foreign
Figure 19: Loans (% yoy)
                                                                                                                                                                                                     assets improved by BGN 219 mn (foreign assets increased by
   80%                                                                                                                                                                                               BGN 131 mn, and foreign liabilities decreased by BGN 88 mn).
   70%
   60%
   50%                                                                                                                                                                                               In February the loans to non-financial enterprises decreased by
   40%
   30%
                                                                                                                                                                                                     BGN 149 mn. The decrease was relatively equally distributed
   20%                                                                                                                                                                                               among overdraft and loans (respectively BGN 71 and 78 mn). A
   10%
    0%                                                                                                                                                                                               large decrease was observed for loans with maturity between 1
   -10%
   -20%
                                                                                                                                                                                                     and 5 years – about BGN 120 mn, while long-term loans (with
                                                                                                                                                                                                     maturity above 5 years) increased by BGN 79 mn. A positive
                                      Jul-07




                                                                                      Jul-08




                                                                                                                                                                         Jul-10
                         Apr-07




                                                                          Apr-08




                                                                                                                       Apr-09
                                                                                                                                  Jul-09




                                                                                                                                                                Apr-10
            Jan-07




                                                              Jan-08




                                                                                                            Jan-09




                                                                                                                                                      Jan-10




                                                                                                                                                                                            Jan-11
                                                  Oct-07




                                                                                                 Oct-08




                                                                                                                                            Oct-09




                                                                                                                                                                                  Oct-10




                                                       Households                                 Non-financial enterprises                                                                          indication came from the decrease of bad and restructured loans
                                                                                                                                                                                                     by about BGN 21 mn. The loans to households maintained
                                                                          Source: BNB, Raiffeisen RESEARCH
                                                                                                                                                                                                     approximately their January level – their decrease was minimal
Figure 20: Deposits (% yoy)                                                                                                                                                                          at about BGN 6 mn. By components, the changes were also
                                                                                                                                                                                                     minor – overdraft decreased by BGN 5 mn, and consumer loans
   60.0%

   50.0%
                                                                                                                                                                                                     – by about BGN 4 mn, while mortgage loans increased by
   40.0%                                                                                                                                                                                             about BGN 3 mn. Bad and restructured loans however continued
   30.0%
                                                                                                                                                                                                     increasing, and compared to January their increase was by
   20.0%

   10.0%
                                                                                                                                                                                                     about BGN 52 mn.
    0.0%

   -10.0%                                                                                                                                                                                            In February the deposits of non-financial enterprises declined by
   -20.0%
                                                                                                                                                                                                     BGN 99 mn mom (0.8%), while those of households continued
                                         Jul-07




                                                                                        Jul-08




                                                                                                                                   Jul-09




                                                                                                                                                                         Jul-10
                             Apr-07




                                                                             Apr-08




                                                                                                                         Apr-09




                                                                                                                                                                Apr-10
                Jan-07




                                                                 Jan-08




                                                                                                              Jan-09




                                                                                                                                                       Jan-10




                                                                                                                                                                                            Jan-11
                                                     Oct-07




                                                                                                   Oct-08




                                                                                                                                             Oct-09




                                                                                                                                                                                  Oct-10




                                                                                                                                                                                                     increasing by the known historical rates – BGN 191 mn (0.7%).
                                                       Non-financial enterprises                                                  Households



                                                                          Source: BNB, Raiffeisen RESEARCH




                                                                                                                                                                                                                                                                    7
   External Sector

Positive C/A balance in January
due to record high amount of export of goods

Figure 21: Current account by components
(EUR mn)

 800.0
                                                                                                               After realizing negative balances in the last two months of 2010,
 600.0                                                                                                         which is typical for these months of the year, in January 2011
 400.0
 200.0
                                                                                                               the C/A again turned to positive territory. The surplus was at the
    0.0                                                                                                        amount of EUR 155 mn, as compared to nearly EUR 300 mn
                                                                                                               deficit in January 2010. All its main components improved on an
 -200.0
 -400.0
 -600.0                                                                                                        annual basis.
 -800.0
-1000.0
-1200.0                                                                                                        The favourable development of the C/A was mainly stemming
                I     III    V VII IX XI       I    III   V VII IX XI       I    III    V VII IX XI        I
                                                                                                               from the positive trade balance, which surprisingly reached EUR
                             2008                          2009                          2010         2011
                                                                                                               111.7 mn. In contrast, large deficits of the trade balance were
                                                                                                               typical for the whole period of economic boom and were the
               Trade balance                        Services, net                      Income, net

               Current transfers, net               Current account
                                                                                                               primary reason for the C/A deficits.
                                                                                       Source: BNB
                                                                                                               However, a certain revision of the trade balance data could be
Figure 22: Trade balance (EUR mn)                                                                              envisaged, as a negative amount of net errors and omissions
                                                                                                               was registered for the month. Nevertheless, the value of the C/A
  200                                                                                                          will probably remain more favourable, as compared to the
       0
                                                                                                               historical data.
  -200
                                                                                                               The rapid export growth was the main contributor to the
  -400                                                                                                         improvement of the trade balance. In nominal terms, export of
  -600
                                                                                                               goods reached almost EUR 1.6 bn, which is a record-high value
                                                                                                               for this month of the year (over 70% increase yoy). In
  -800
                                                                                                               comparison, in January 2008 when Bulgaria’s export was not
 -1000                                                                                                         yet affected by the deteriorated foreign economic conditions,
               I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I
                                                                                                               export of goods amounted to EUR 1.1 bn.
               1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 '10'11

                                                                                                               Import of goods also continued growing. Its value in January
                                                                                       Source: BNB
                                                                                                               2011 was circa EUR 1.5 bn or 35.6% more compared to
Figure 23: Export and import of goods (EUR                                                                     January 2010. Even so, it remained much below the pre-crisis
bn)                                                                                                            levels, mainly due to the slow recovery of the domestic demand
                                                                                                               in the country.
 2.5


 2.0                                                                                                           The balance on services was positive (EUR 60 mn), vs. a deficit
                                                                                                               of EUR 23.4 mn a year ago. Export of services rose by nearly
 1.5
                                                                                                               40% based on the growth of transport and communication
 1.0                                                                                                           services. Import of goods stayed relatively flat on an annual
 0.5                                                                                                           basis.
 0.0                                                                                                           The income account posed negative balance (EUR 62.8 mn), but
           I        III V VII IX XI        I       III V VII IX XI      I       III V VII IX XI        I
                                                                                                               also improved compared to January 2010, as its deficit
                            2008                          2009                          '10           '11
                                                                                                               contracted by almost 60%. The latter was a consequence of the
                                               Export         Import
                                                                                                               decline of income paid to foreign investors. Net current transfers
                                                                                                               remained almost unchanged compared to January 2010 (EUR
                                                                                       Source: BNB
                                                                                                               50 mn).




                                                                                                                                                                               8
       External Sector

Figure 24: Financial account (EUR mn)                                                                                                                               In January the balance on the capital account was close to zero,
  2000                                                                                                                                                              while a negative balance of EUR 610.6 mn was registered on
  1500                                                                                                                                                              the financial account.
  1000
                                                                                                                                                                    Foreign direct investment (FDI) was the only main component of
       500
                                                                                                                                                                    the financial account with a positive inflow. Net FDI in Bulgaria
         0
                                                                                                                                                                    almost doubled vs. January 2010 and amounted to EUR 95.4
   -500
                                                                                                                                                                    mn. Nevertheless, they remained significantly below their levels
 -1000                                                                                                                                                              for the same month of 2009 and before the recession.
                   I        III     V VII IX             XI        I         III       V VII IX        XI    I       III       V VII IX        XI       I

                                        2008                                            2009                                     '10                   '11
                                                                                                                                                                    The balance on the portfolio investment was negative at the
                                         Direct investment, net                                       Portfolio investment, net
                                         Other investment, net                                        Financial account                                             value of EUR 109.1 mn and about 2.5 times bigger than the
                                                                                                                                                                    deficit from January 2010. This was stemming from the reduction
                                                                                                                           Source: BNB
                                                                                                                                                                    of liabilities, as a result of the payment of interests on Bulgarian
Figure 25: Gross External Debt (EUR bn, % of
GDP)                                                                                                                                                                global bonds from the central government.
 40.0
 35.0
                                                                                                                                                    140
                                                                                                                                                                    Similarly to the first months of 2010, in January there was a net
 30.0
                                                                                                                                                    130
                                                                                                                                                                    outflow on the other investment account reaching EUR 610.6 mn.
                                                                                                                                                    120
 25.0
                                                                                                                                                                    Almost the whole amount was flowing from the account of
 20.0                                                                                                                                               110
 15.0
                                                                                                                                                    100
                                                                                                                                                                    currency and deposits. In January the Bulgarian banks invested
 10.0
                                                                                                                                                    90
                                                                                                                                                                    abroad currency and deposits at the amount of EUR 360 mn.
  5.0
  0.0                                                                                                                                               80
                                                                                                                                                                    Meanwhile currency and deposits of non-residents, held in the
bn EUR
                 I III V VII IX XI I III V VII ІХ ХI I III V VII ІХ ХI I
                                                                                                                                                   %                country, declined by EUR 230 mn.
                                   2008                                            2009                              2010                2011

                                                                  bn EUR                       % of GDP                                                             The balance on the current, capital and financial account was
                                                                                                                                                                    EUR -469.3 mn in January 2011. Net errors and omissions
                                  Source: BNB, NSI, Raiffeisen RESEARCH
                                                                                                                                                                    amounted to EUR -159 mn and therefore the overall balance of
Figure 26: Gross external debt by sectors (EUR
bn)
                                                                                                                                                                    payments was negative at the value of EUR 628.3 mn. This led
40.0
                                                                                                                                                                    to a decrease of the FX reserves of BNB by the same amount.
35.0

30.0
                                                                                                                                                                    Bulgaria’s gross external debt amounted to 36.3 bn in January.
25.0                                                                                                                                                                On a yearly basis it dropped by almost EUR 1 bn, and on a
20.0                                                                                                                                                                monthly basis – by EUR 361.2 mn. As a share of the Raiffeisen
15.0
                                                                                                                                                                    RESEARCH’s forecasted GDP it shrank to 100.8% vs. 103.8% in
10.0

 5.0
                                                                                                                                                                    January 2010.
 0.0
         I       III    V VII IX XI            I       III    V VII IX XI                 I   III    V VII ІХ ХI           I    III   V VII ІХ ХI               I   After all sectors slightly increased their gross external debt in the
                        2007
                       Other sectors
                                                                  2008
                                                        General government
                                                                                                     2009
                                                                                                      Intercompany loans
                                                                                                                                       2010
                                                                                                                                              Banks
                                                                                                                                                       2011
                                                                                                                                                                    last months of 2010, in January most of them turned back to the
                                                                                                                                                                    trend of reducing their debt, which was predominant during the
                                                                                                                               Source: BNB                          last year.
Figure 27: FX reserves vs. short-term debt (EUR
bn)                                                                                                                                                                 The main driving force of the reduction of the gross external debt
16.0                                                                                                                                                                in January was the banking sector. Its debt declined by EUR
14.0
                                                                                                                                                                    202.7 mn, mainly due to the withdrawal of non-residents’
12.0
                                                                                                                                                                    deposits from the country. In January the foreign debt of the
10.0
                                                                                                                                                                    central government also fell – by EUR 150.9 mn.
 8.0


                                                                                                                                                                    In the first month of 2011 BNB’s FX reserves decreased more
 6.0

 4.0

 2.0
                                                                                                                                                                    than the gross external debt – compared to December 2010 they
 0.0
                                                                                                                                                                    dropped by EUR 753 mn to EUR 12.2 mn. As a result, the
             I         IV         VII    X         I         IV        VII         X      I     IV     VII       Х         I     IV     VII    Х            I       coverage of short-term liabilities by BNB’s FX reserves fell to
                            2007                                  2008                               2009                             2010          2011            108.6% vs. 113% in the end of 2010.
                                         FX reserves                                          Short-term external debt

                                                                                                                               Source: BNB




                                                                                                                                                                                                                                       9
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