14.02.2012

Today the EC presented an alert mechanism report that marks the first step in implementing the new surveillance procedure for the prevention and correction of macroeconomic imbalances in EU Member States. The procedure is based on two new regulations of the European Parliament and of the Council in force as from 13 December 2011.

The document is an initial screening device of 10 macroeconomic indicators for all EU Member States. For each of the indicators a threshold has been calculated the exceeding of which is a sign for alert. The indicators used are based on average values for a 3- or 5-year period, so they do not reflect the current situation but report development. The conclusions point out to 12 states that should be analysed in depth among which is Bulgaria. Bulgaria exceeds the thresholds of three indicators for external imbalances and one for internal imbalances - current account balance as a share of GDP, net international investment position (NIIP) as a share of GDP, unit labour costs (ULC), as well as private sector indebtedness as a share of GDP.

In particular as to the indicators for Bulgaria it should be noted that the high economic growth rate in the period 2006-2008 was accompanied by large current account deficits, higher inflation, considerable private credit growth and a rise in ULC.

The current account balance indicator shows that in 2010 Bulgaria has not met the threshold of less than - 4% of GDP. The period analysed is 2008-2010 and the analysis shows that the deficits for 2008 and 2009 are 23.1 and 8.9% respectively. In 2010 the current account deficit was only 1.3%. The high deficits resulted from capital inflows (mostly in the form of FDI) in the Bulgarian economy before the global financial and economic crisis. In respect of FDI Bulgaria was leader among the new EU Member States.

The rapid shrinking of the current account deficit is indicative for the economy's high degree of flexibility. The current account correction resulted in low deficit of 1.3% of GDP for 2010, while in 2011 the current account balance will be in surplus of around 1.8% of GDP. Strong export performance and the improvement of cost competitiveness are the main reasons for the better external position. According to Ministry of Finance estimates, and that of international institutions, it is not expected Bulgaria to exceed the current account deficit threshold.  

The negative level of NIIP for 2010 above the threshold of -35% of GDP is driven by considerable capital inflows in the form of FDI and by financing the national banking system by foreign parent banks in the years before the crisis, as well as by the relatively low level of GDP compared to capital inflows. Economies in the process of convergence such as Bulgaria are attractive to foreign financial flows because the rate of return is higher compared to the old EU Member States. According to forecasts the deficit under this indicator is going to shrink by 26 p.p. by 2013.

Private sector indebtedness includes all types of company and household liabilities to financial institutions and among themselves, as well as to non-residents among which parent companies or owners of enterprises operating on the territory of the country. The total private sector debt/GDP ratio for Bulgaria was 169% at the end of 2010 or slightly above the upper limit of 160%. After Bulgaria's accession to the EU, the upward trends of economic development have lead to sizeable volumes of foreign investment needed for a small and open economy as the Bulgarian one, but on the other hand constituting private sector indebtedness. Along with the high pre-crisis growth of bank loans, this has lead to an increase in the overall indebtedness of this sector.

In 2011 there was a trend of repayment of liabilities from banks to parent banks and from subsidiaries to their owners abroad, as well as repayment of inter-company liabilities. As of end-2010 the level of receivables of the banking system only from the non-government sector was 74,2%, while at end-September 2011 it dropped down to 70,5%. In addition, we should also have in mind the growth of private sector savings, which will help for this trend to continue in the short run at least. As a result, we may conclude that the indicator for Bulgaria dropped in 2011, while not excluding the possibility for it already being below its limit.  

The dynamics of nominal ULC in 2010 exceeded the indicative threshold of 12%, which was mostly due to the relatively high levels of modification of this indicator in the period 2007-2009. In the pre-crisis period the Bulgarian economy was characterized by an accelerated growth of labour productivity and income compared to the average EU levels influenced by the process of convergence and the great demand. Overheating of the economy, as well as the incongruence between labour force supply and demand in certain economic activities have resulted in a pre-empt income dynamics compared to labour productivity. An example in this respect is the annual increase in the minimum insurable income aiming to legalize undeclared income and influencing directly and indirectly the average income in the country. The trend of labour cost optimization is expected to continue in the medium term as well, enabling the indicator to cover the criterion of 12%.

Greece, Ireland, Portugal and Romania remain outside the Alert Mechanism Report for they are already monitored closely under financial assistance programmes and no excessive imbalance procedures may be launched against them. As early as February 2011 ECOFIN confirmed the evaluation of the European Commission according to which Bulgaria had taken effective actions to adjust its budget deficit. The efforts of the Bulgarian government for budget austerity and fiscal consolidation were thus recognized.