Bulgaria

Bulgaria, the EU’s poorest country in terms of economic output per capita, weathered the global crisis without borrowing from lenders abroad. Growth slowed to 0.5 percent from a year earlier in the second quarter, the same as in the first three months. The government works to cut the budget gap to help contain the fallout from the euro debt crisis. The economy should begin showing more signs of recovery in 2013, according to UniCredit Bulbank’s latest Quarterly Macroeconomic Update. Analysts of the bank suggest that Bulgaria should be able to win back foreign investors’ confidence as financial market tensions are not expected to escalate much further. The Bank has kept its GDP growth forecast unchanged at 0.5% in 2012 and 1.5% in 2013.

According to the Finance Ministry, Bulgaria’s economy is forecast to expand 1.9 percent in 2013 after an estimated 1.2 percent growth in 2012, driven by increasing demand and investment linked to European Union aid. Next year’s budget-deficit assumption is one percent of GDP after 1.3 percent of GDP this year. The government forecasts average EU-harmonized inflation at 3.4 percent next year, after 2.6 percent this year. The European Commission forecasts the economy to expand 0.5 percent this year and 1.9 percent in 2013.The International Monetary Fund raised this year’s economic growth forecast to one percent and to 1.5 percent for 2013 citing recovering exports. The economy grew 1.7 percent last year, after a revised 0.4 percent in 2010.

The 2012 fiscal cash deficit is on track to fall to 1.25 percent of GDP, making substantial progress towards the 2015 target of a balanced budget. According to the Fund’s latest assessment, targeting an unchanged budget deficit in 2013 would preserve the credibility of the adjustment that resulted in lower yields on government debt. Within a tight budget envelope it will be necessary to resist pressures for generalized wage increases. Any over performance should be used to boost the fiscal reserve. However, in the event there were to be a severe downturn, the deficit should be allowed to adjust to the economic cycle. Boosting growth and employment will require bolder structural reforms. Higher capital spending funded by better absorption of EU funds would stimulate growth and tackle infrastructure gaps.

In June, the World Bank revised sharply downwards forecasts for Bulgaria’s economy, estimating it is to expand just 0.6% this year. At the beginning of May the European Commission slashed its forecast for Bulgaria’s economy, estimating it is to grow just 0.5% this year. In July this year, the EBRD reduced its forecast for economic growth in 2013 to 1.7 per cent, compared to 2.5 per cent projected in May. For 2012, the forecast remains unchanged at 1.2 per cent, marginally lower than the Cabinet growth target of 1.4 per cent. Recovery is expected to continue to be modest in Bulgaria into 2012, in contrast to earlier projections of vigorous growth, due to sluggish export demand. However, the government continues to adhere to fiscal prudence, with the government budget marginally in surplus in the first five months of the year.

Standard & Poor’s ratings agency expects Bulgaria’s GDP growth to stand at about 0.5% in 2012 and accelerate to 3% after 2013 as recovery in external demand trickles through the economy. The forecast for 2012 reflects the continued weakness in domestic demand and moderation of previously strong export performance, amid a decline in external demand in particular from the EU. In their latest statement the analysts of the rating agency expect the government to over-perform this year’s budget deficit target of 1.6% of GDP and to cut the deficit further in the coming years. As a result, they expect general government debt will be around 17% of GDP in 2012 and decline thereafter.

Romania

Romania has been passing through a difficult time in the last three years, marked by harsh austerity measures that culminated in a 25 percent cut in public sector wages, a reduction of 15percent of pensions and an increase in VAT from 19 percent to 24 percent in 2010. The EBRD estimated that Romania’s GDP had grown by 2.5percent in 2011 instead of one-percent as previously estimated. Given the broader economic situation in Europe, the Bank estimated that Romania’s GDP for 2012 would grow somewhere between 1.1percent and 0.8percent. The IMF in January had forecast Romania’s GDP this year to grow by a maximum of two-percent.

The annual inflation rate dropped to 3.14percent in December, from the 3.44percent recorded in November, and the National Bank of Romania (NBR) projected an annual inflation rate of 3percent for 2012. Romania’s budget deficit narrowed to 4.35percent of GDP in 2011 from 6.5percent of GDP in 2010, below the 4.4percent target set for 2011. In August, consumer prices added 0.51percent over the previous month, which followed the 0.59percent increase recorded in July. The increase was the result of higher prices in all categories, particularly food items. As a result, annual headline inflation jumped from three-percent in July to 3.9percent in August, exceeding market expectations of 3.7 percent.

Annual average inflation, however, inched down from 2.9% in July to 2.8%. The Central Bank expects inflation to end the year at 3.2% and to moderate to 3.0% in 2013. The BNR inflation target is 3 percent in 2012 and 2.5 percent in 2013. Inflation followed positive trends in the second quarter of 2012 when it was strongly falling and neared the lower limit of the targeted interval. Determinant to inflation in the second quarter were mainly the factors that brought prices down and a persistent demand deficit, temporary tension easing on the world oil markets and favourbale influences of external prices for raw materials and consumer goods.

Romania is maintaining its position as a leader concerning the interest rate cuts in emerging markets. At the end of January the Central Bank reduced its benchmark interest rate for the third time, taking it down 25 basis points to a record low of 5.5percent. There are voices considering that Romania’s economy could be the first to emerge from the European crisis with strong economic growth. The IMF mission for Romania stressed that despite the adjustment, dictated by the broader evolution in the EU, Romania’s economy will still perform better than the EU average.

Romania could post a 2.5 percent economic growth next year, higher than the 2.1 percent forecast for Poland, the largest economy in the region. This could happen following a slowdown of the Polish economy. IMF expects the Romanian economy to grow by 0.9 percent this year and by 2.5 percent in 2013. The last time Romania has managed to post a higher economic growth than Poland was in 2008 when the local economy increased by 7.3 percent. In the years then followed Romanian GDP dropped by 6.6 percent (2009) and 1.6 percent (2010) and grew by 2.5 percent (2011).

The European lender noted that Romania’s economy recovered last year and was on track to record robust growth in 2012, but the weak growth of the Euro zone and the political crisis that has unfolded in recent weeks could harm the economy. However, the loans taken out from the IMF and other international lenders provided an important buffer for the economy. The EC official argued that Romania’s biggest challenge is the revitalization of its economy. Political stability is needed and politicians need to focus on the economic game. Only in this way there is hope for sustainable growth in Romanians living standards. State companies need to be reformed, the numerous vicious connections between government departments and companies need to be cut off, and these need to be run professionally, so as to make use of their assets for the benefit of the Romanian citizens.

Romania needs financing this year representing 10.9 per cent of its GDP – 8.7 per cent borrowings falling due and 2.2 per cent budget deficit and, next year, the financing will represent 10.6 per cent of the GDP, of which 8.8 per cent will be loans falling due and 1.8 per cent of the GDP estimated budget deficit. The National Bank of Romania‘s foreign exchange reserves stood at EUR 30.9 billion in August, falling by 3.8 percent from the previous month, after the country paid the first installment of an IMF loan. Romania registered capital inflows of EUR 1.1 billion, which represent changes in forex requirements of credit institutions, income from forex management and inflows in the accounts of the European Commission and the Ministry of Public Finance.

Macedonia

Macedonia is one of the poorest countries in Europe. A third of the population is below the poverty line. That hasn’t stopped the government running a concerted and doubtless expensive campaign to promote the country as an investment destination – and as a regional poster boy for economic reform. The tiny country of just over 2m people is indeed outperforming some of its neighbours. But translating this into job creation has proved difficult. The government and its predecessors have done a remarkable job of locking in macroeconomic stability, in a region where not a few countries are nearing basket-case status.

Macedonia has done reasonably well in attracting foreign direct investment during some tough years for the global economy. But growth remains well below levels needed to catch up even with the more successful former Yugoslav countries. The economy will experience a growth of one percent in 2012 and a 2% growth in 2013, according to the IMF. The latest projection by the EBRD reveals that the Macedonian economy will rise by 1.3 percent in 2012. Macedonia experienced a surprisingly strong growth in the first half of 2011, spurred by high exports and FDI, but growth slowed down substantially in the second half of the year and the beginning of 2012 due to unfavorable developments in the eurozone.