BULGARIAN ECONOMY ON THE ROAD TO EUROPEAN UNION AND ECONOMIC

AND MONETARY UNION

IVAN ISKROV

GOVERNORBULGARIAN NATIONAL BANK

14 July 2006Athens

2

OUTLINE• INITIAL CONDITIONS AND TRANSITION PROCESS

• MACROECONOMIC AND FINANCIAL FRAMEWORK

• ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES

• EU AND EMU PERSPECTIVES

• REGIONAL PERSPECTIVES

3

INITIAL CONDITIONS AND TRANSITION PROCESS

• Planning economy with lack of functioning markets

• Bulgarian economy was highly integrated within Council for Mutual Economic Assistance

• Economy was not subject to competitive pressure• Distorted incentives• Transition was a unique process without historical

experience to draw from• Political consensus on society’s priorities was a

key prerequisite for successful transition

4

MACROECONOMIC AND FINANCIAL FRAMEWORK

• Euro-based currency board since mid 1997• Prudent and predictable fiscal policy oriented

towards balanced budget or surplus• Withdrawal of the state from the business

through large scale privatization of the state owned enterprises

• Liberalization of the markets – free movement of goods, services and capital

• Government policy oriented towards improvement of investment climate

5

GENERAL GOVERNMENT BALANCE

-4

-3

-2

-1

0

1

2

3

4

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

Maastricht criterion

6

GOVERNMENT DEBT

0

10

20

30

40

50

60

70

80

90

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

Maastricht criterion

7

BULGARIAN SOVEREIGN SPREAD

0

200

400

600

800

1000

1200

14/4

/00

14/7

/00

14/1

0/00

14/1

/01

14/4

/01

14/7

/01

14/1

0/01

14/1

/02

14/4

/02

14/7

/02

14/1

0/02

14/1

/03

14/4

/03

14/7

/03

14/1

0/03

14/1

/04

14/4

/04

14/7

/04

14/1

0/04

14/1

/05

14/4

/05

14/7

/05

14/1

0/05

14/1

/06

14/4

/06

b.p.

EMBI+ Bulgarian Sovereign Spread EMBI+ Emerging Market Spread

8

REAL GDP GROWTH

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005

%

9

FOREIGN DIRECT INVESTMENTS IN BULGARIA

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

10

REAL GROWTH OF GROSS FIXED CAPITAL FORMATION

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005

%

11

SHARE OF THE GROSS CAPITAL FORMATION IN GDP

0

5

10

15

20

25

30

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

12

GROWTH OF THE REAL GDP PER PERSON EMPLOYED

-4

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005

%

13

GROWTH OF THE UNIT LABOUR COSTS

-8-6-4-202468

10

1999 2000 2001 2002 2003 2004 2005

%

Nominal Unit Labour Costs Real Unit Labour Costs

14

EMPLOYMENT GROWTH

-4

-2

0

2

4

6

8

1999 2000 2001 2002 2003 2004 2005

%

15

UNEMPLOYMENT RATE

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005

%

16

ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES

• High consumption and investment growth

• Dynamic credit growth

• External imbalances

• Limited scope for policy reaction of the central bank

• Limits of conservative fiscal policy

17

REAL GROWTH OF CONSUMPTION

0123456789

10

1999 2000 2001 2002 2003 2004 2005

%

18

SAVINGS AND INVESTMENTS BALANCE

-20

-15

-10

-5

0

5

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

Current Account Government "S-I" Balance Private Sector "S-I" Balance

19

EXTERNAL POSITION

-25

-20

-15

-10

-5

0

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

Current Account Balance Trade Balance

20

CREDIT TO THE PRIVATE SECTOR

05

101520253035404550

1999 2000 2001 2002 2003 2004 2005

% o

f GD

P

21

GROWTH RATE OF THE CREDIT TO THE PRIVATE SECTOR

0

10

20

30

40

50

60

1999 2000 2001 2002 2003 2004 2005 May-06

%

22

EU AND EMU PERSPECTIVES

• BNB and Government signed in 2004 an agreement that defines the strategy for Euro adoption

• Joining Exchange Rate Mechanism II immediately after EU membership

• Maintaining unilaterally currency board at the current exchange rate – BGN 1.95583/EUR 1

• Bulgarian economy is in good position to fulfill Maastricht criteria

• Inflation criterion is a challenge

23

LONG-TERM INTEREST RATES

012

3456

789

2002 2003 2004 2005

%

Maastricht criterion

24

AVERAGE INFLATION

-4

-2

0

2

4

6

8

10

12Ja

n-9

9

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-0

1

Jan

-02

Jul-

02

Jan

-03

Jul-0

3

Jan

-04

Jul-0

4

Jan

-05

Jul-0

5

Jan

-06

%

Inflation Maastricht inflation criterion Inflation excl Administrative Prices and Excise Tax Effects

25

REGIONAL PERSPECTIVES

• Greek business and politicians extended consistent support to economic and political reforms in Bulgaria

• Greek economy has very strong ties with Bulgarian economy through trade of goods and services and direct investments

• The accession of Bulgaria and Romania in EU opens economic opportunities for the Balkans that our region have never had in its history

26

GEOGRAPHICAL STRUCTURE OF FOREIGN TRADE (2005)

4%6%

9%

14%

15%

52%

EUROPEAN UNION BALKAN COUNTRIESOTHER EUROPEAN COUNTRIES (incl Russia)ASIAN COUNTRIESAMERICAN COUNTRIES OTHER

9%

6%

5%

4%

10%

10%

13%

19%

23%

GERMANY ITALY GREECE FRANCEBELGIUM SPAINUK OTHER OLD MEMBER STATESNEW MEMBER STATES

All EU

27

GEOGRAPHICAL STRUCTURE OF THE EU’s FDI IN BULGARIA

5%

6%

7%

7%

12%

7%8%

12%

35%

AUSTRIA GREECE CYPRUSGERMANY ITALY BELGIUMNETHERLANDS UK Rest of EU

18%

82%

EU REST OF THE WORLD

All EU