A report released on the 20th of April from Deutsche Bank states that Bulgaria’s real GDP growth is expected to decelerate from 1.7% yoy last year to around 1% yoy this year. Growth prospects are clouded by fiscal consolidation, the ongoing deleveraging of households and companies, and still subdued growth in the EU, Bulgaria’s main trading partner. Increased absorption of EU funds (standing at 78% in February) is set to continue to support domestic investment. High degree of monetary stability Inflation is expected to remain very low, at roughly 1% yoy this year. Moreover, the currency board arrangement enjoys high credibility enforced through sufficient FX reserve coverage (52% of M2) and a clear exit strategy (ERM II entry planned for 2018).
If Greece’s crisis worsened, Bulgarian banks with Greek parents could be more at risk of deposit outflows. Amounting to 20% of GDP, foreign claims by Greek banks are still relatively high in Bulgaria (see chart). Nevertheless, potential contagion from the Greek crisis is mitigated by the fact that Bulgaria’s banks aremostly deposit funded (the system-wide loan-to-deposit ratio has fallen to 97% from 140% in the previous stress episode in ‘08/’09). Relatively low public debt level despite significant banking-crisis clean-upcosts The collapse of Bulgaria’s fourth largest bank last summer and subsequent bank run have negatively impacted Bulgaria’s sovereign balance sheet. Increased government borrowing (state loans to the deposit insurance fund) led to an increase in the public debt level from 19% of GDP in 2013 to 28% in 2014(see chart). As the government remains committed to a return to fiscal prudence, we expect it to cut the fiscal deficit from 3.7% last year to around 3% of GDP this year. Moreover, the EUR 3.65 bn fiscal reserve fund provides an important buffer, covering 31% of total public debt. Despite the ongoing deleveraging in the banking sector and a roughly balanced current account, Bulgaria’s total external debt remains high at 96% of GDP. Refinancing risks are mitigated by the fact that intercompany lending, which tends to be rolled over, accounts for 40% of total external debt. This is especially importantgiven that 2015 external financing requirements stand at a high 100% of FX reserves.