Transcript Foreign Direct Investment in Romania and the Balkans Joan

Bulgaria: Economic Performance,
Prospects and Risks
Craig Otter, Economist Intelligence Unit
May 11th 2007
Outline

Economic performance 1996-2006

Economic prospects 2007-2008

Key challenges

Conclusion
Growth robust and stable
Real GDP growth, % and contributions, pp
15
10
Net trade
Investment
Public exp
Private exp
Actual growth
5
0
-5
-10
-15
1996
1998
2000
2002
2004
2006
Falling unemployment
Unemployed persons, % of labour force
20
18
16
14
12
10
8
6
4
2
0
1996
1998
2000
2002
2004
2006
Moderating price and wage inflation
Consumer price index and wages, average % change
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
18
16
14
12
10
8
6
4
2
0
CPI
Wages
Supportive fiscal policy
Government budget balance, % GDP
4
2
0
-2
-4
-6
-8
-10
-12
1996
1998
2000
2002
2004
2006
Credit expanding fast, but level low
Growth in domestic credit stock
35
30
25
20
15
10
5
0
-5
-10
120
100
80
60
40
20
0
1996 1998 2000 2002 2004 2006
Growth (Left axis)
% GDP (Right axis)
External weakness growing
External balances, % of GDP
15
10
5
0
CA balance
Trade balance
-5
-10
-15
-20
-25
1996
1998
2000
2002
2004
2006
Overall debt dynamics favourable
External debt, % GDP
120
100
80
Private sector
Public sector
60
40
20
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
Foreign capital inflows booming
Foreign Direct Investment, US$mn
6000
5000
4000
3000
2000
1000
0
1996
1998
2000
2002
2004
2006
FDI shifting focus
FDI by sector, average share of total FDI in 1997-98
Other
Construction
Financial
intermediation
Wholesale and retail
trade etc.
Transport, storage
and communication
Manufacturing
FDI shifting focus (continued)
FDI by sector, average share of total FDI in 2005-06
Wholesale and retail
trade etc.
Construction
Other
Energy
Financial
intermediation
Real estate, renting
and business
activities
Manufacturing
Capital investment driving potential output
Growth in labour, capital and total factor productivity, %
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Capital
TFP
Labour
Potential output
1996
1998
2000
2002
2004
2006
Business environment improves
World Bank Ease of Doing Business Rank (1 = highest)
0
10
20
30
40
50
60
70
80
90
100
2007
2006
UK LT EE DE LV FR SK RO CZ BG SQ HU PL IT RU
Catch-up proceeding slowly
Ratio of Bulgarian to EU-27 and CEE GDP per head at PPP
90
80
70
60
50
EU-27
CEE
40
30
20
10
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
0
EU15 growth at
2% pa
Lithuania
Latvia
Estonia
Serbia
Croatia
Romania
Bulgaria
Slovenia
Slovakia
Poland
Hungary
Czech
Catch up: GDP per head, EU15=100
90
80
70
60
50
40
30
20
10
0
2005
2025
Currency board

Reserves have been rebuilt since 1996-97


Peg has been in place since July 1997




Currency pegged to D-Mark and currency restrictions introduced
Anchor currency shifted to euro in 1999, restrictions lifted in 2000
Base money is matched by foreign reserves
Elements of currency board




Authorities were unable to prevent financial crisis in 1996-97 and decline in
external value of the lev
A fixed exchange rate between lev and euro (BGN1.96=EUR1.00)
Convertibility of lev
A long-term commitment to the system by the authorities
Threats to currency board contained for now

Disinflation and euro weakness have mitigated real appreciation pressures
under currency board system since 1997
 However, rising price pressures and weaker US dollar against euro in 200607 have suggest real appreciation could place currency board under strain
Currency board
Reserves and the monetary base (US$ m)
12000
10000
8000
Intl. reserves
M1
6000
4000
2000
0
1996
1998
M1 includes demand accounts
2000
2002
2004
2006
Economic prospects

Strong GDP growth
 Inflation resumes downward momentum
 Fiscal policy remains tight
 Monetary policy dedicated to currency board
 Even if lev appreciation, cost-advantage remains
 Large current-account deficits
 Manageable external debt service
 Strong, though falling, FDI inflows
 High levels of reserves
 Continuation of reforms
Growth to remain rapid
Real GDP growth, %
7
6
5
4
Bulgaria
Eastern Europe
3
2
1
0
2002 2003 2004 2005 2006 2007 2008 2009
Disinflation to continue
Inflation, average annual %
8
7
6
5
Bulgaria
Euro zone
4
3
2
1
0
2002 2003 2004 2005 2006 2007 2008 2009
External weakness to persist
Current account balance, % GDP
0
-2
-4
-6
-8
Bulgaria
-10
Eastern Europe
-12
-14
-16
-18
-20
2002 2003 2004 2005 2006 2007 2008 2009
FDI receipts to start falling
Net FDI inflows, US$bn
8000
7000
6000
5000
Hungary
Bulgaria
4000
3000
2000
1000
0
2002 2003 2004 2005 2006 2007 2008 2009
FDI receipts to start falling (continued)
Net FDI inflows, as % of GDP
16
14
12
10
Bulgaria
Hungary
8
6
4
2
0
2002 2003 2004 2005 2006 2007 2008 2009
Economic risks

Managing underlying vulnerabilities


Continuing structural reform post-EU


Maintaining reform momentum after EU accession
A very poor demographic outlook


External deficit
Need to review labour market incentives
Growth challenge
can +5% pa growth be sustained?
CA deficit financing has deteriorated
Net FDI inflows, % of Current account balance
300
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
External deficit

Has grown partly as a consequence of FDI inflows



Private sector foreign borrowing is more worrying


This has been shown to a be key factor in supporting income convergence …
but economic vulnerability is higher nonetheless
Need to monitor risks allied to foreign borrowing
Export performance crucial

Although non-trade elements of CA have also deteriorated, hopes for
improving external stability rest with a recovery of exports
 Data certainly no clear price- or wage-based competitiveness concerns
 But continuing structural reforms needed to ensure state enterprises are
restructured

Sustainability threat not obvious

IMF research suggests that CA imbalance is broadly consistent with
Bulgaria’s stage of economic development
Price competitiveness
Gross monthly wages, US$
Predicted
Actual
Act/pr
Predicted
Actual
Act/pr
Czech
685
701
1.02
Bulgaria
268
190
0.71
Hungary
725
719
0.99
Romania
242
253
1.04
Poland
619
627
1.01
Albania
206
236
1.14
Slovakia
661
491
0.74
B&H
372
475
1.28
Slovenia
1,398
1,478
1.06
Croatia
666
922
1.49
Estonia
636
573
0.90
Macedonia
345
421
1.22
Latvia
450
390
0.87
Serbia
257
350
1.36
Lithuania
570
472
0.83
“Equilibrium wages” estimated or predicted on the basis of a relationship between wages
and productivity (output per employed, at PPP) and several other variables, across 70
economies.
EU membership and growth
Positive
Reinforces political stability,
reduces risks
Impact on trade/FDI;
removal of residual trade
barriers
Institutional development
aided, albeit over long time
frame
Encourages macro policy
discipline
EU funding for
infrastructure development
Negatives
 Membership removes
reform anchor
Much of acquis
inappropriate for less
developed
Harmonisation pitfalls
- EU social and environment
regulation
- Pressure for tax
harmonisation
Stability or growth bias
EU membership and growth
•
•
•
•
EU entry offers a possibility, not a guarantee of
stimulating per-capita GDP convergence
Key assumptions: trade integration; macro
stability and price competitiveness; further
deregulation; slow institutional improvement
Modest pace of convergence. On baseline
forecast, by 2025 Bulgaria reaches about 40%
of EU-15 average income per head, from less
than 30% at present
Despite post-accession benchmarking, risk that
Bulgaria’s commitment to EU-related reform
weakens in line with greater political disunity
A declining and ageing population
Population by age group, thousands
and dependency ratio
8000
90
80
70
60
50
40
30
20
10
0
7000
6000
5000
4000
3000
2000
1000
0
2004
2025
2050
65+ (Left axis)
15-64 (Left axis)
0-14 (Left axis)
Ratio (Right axis)
Adverse demographics
•
•
•
•
•
•
Bulgaria’s population has been declining for more than a
decade
It is projected to decline by another 24% by 2035 and the
working-age population by 31%
Policies needed to encourage higher labour market
participation
Incentives need to be reviewed to ensure that
participation in the labour force is more effectively
encouraged
The IMF has called for a “release of excess staff from
the public sector”, which it believes would lead to higher
labour supply to the private sector
Poor demographics shared by most CEE states, a
produce of net migration and negative natural population
increase
Assessment of currency board risks

External deficit



Public finances





Perhaps most worrying aspect of recent economic developments
rivate sector component has been rising rapidly, while public sector component has been coming down
because of the government's aggressive prepayments.
Private sector credit growth a concern
Debt structure


Very restrictive (budget balance in surplus since 2004, primary balance in surplus since 1994).
Fiscal overperformance has been used to build up a huge fiscal reserve, and has used this to make
early repayments of public sector external debt.
Private sector debt accumulation


Much of the external deficit is consistent with Bulgaria’s stage of economic catch-up
Non-debt creating finance (FDI) has helped to finance current account deficit, but financing is expect to
deteriorate
75% of Bulgaria's external debt in euros. No large market of BGN-denominated instruments to serve as
a channel for forcing currency adjustment. Portfolio inflows (hot money flows) are relatively minor.
Banking sector

Overwhelmingly under foreign control and improving in terms of profitability and stability.
Summary of challenges
Nature of challenge
Growth
Keep well-balanced
Inflation
Emerging energy dependence could increase inflation
Fiscal policy
Maintain tight fiscal policy
Monetary policy
Preserve currency board despite large external deficit,
manage credit growth and banking sector risk
External sector
Manage and reduce vulnerability
FDI
Competitiveness
Business environment
Ensure opportunities for greenfield investment when
privatisation program comes to an end
Address problem of falling working-age population, invest in
R&D to decrease reliance on labour-cost advantages
Need to further improve institutions and regulations