US embassy cable - 05SOFIA1375

UNCLAS SECTION 01 OF 02 SOFIA 001375 
 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SAVICH 
TREASURY FOR ATUKAROLA 
 
E.O. 12958:  N/A 
TAGS: EFIN, ECON, EINV, BU 
SUBJECT:  BULGARIA?S ECONOMIC OUTLOOK FOR 2005 REMAINS 
POSITIVE 
 
REFTEL: Sofia 1272 
 
1.  SUMMARY:  The Bulgarian economy showed encouraging 
growth of 6 percent in the first quarter of 2005, cementing 
experts? views that the economy will continue to grow in 
2005 despite the political turmoil surrounding the 
formation of the new government.  The Bulgarian National 
Bank (BNB) issued a report the week of July 25 forecasting 
GDP growth of between 5.4-5.8 percent for 2005.  The report 
affirmed the government?s forecast of moderate inflation of 
3.5 percent and acknowledged the Central Bank?s 
effectiveness in lowering credit growth.  With delays in 
planned privatizations, however, the government?s 
expectations of 2.2 billion euro in foreign investment this 
year may turn out to be unrealistic.  This, in turn, would 
increase the risk of a higher current account deficit.  The 
government?s Agency for Economic Analysis and Forecasting 
has already revised upward its forecasted current account 
deficit to 8.5 percent of GDP for 2005.  END SUMMARY. 
 
BULGARIA?S ECONOMY IS OFF TO A STRONG START 
 
2.  STRONG GDP GROWTH IN 1Q-2005:  Following a record-high 
GDP growth of 5.6 percent for 2004, GDP increased by 6 
percent in the first quarter of 2005 led by an increase in 
investment (up by 9 percent) and a pick-up in domestic 
demand (up by 7.3 percent).  The private sector, which made 
up 66 percent of GDP, grew by almost 13 percent, while the 
public sector was down by 8.6 percent.  GDP details show 
that the strong growth in the first quarter of 2005 
reflected a strong outcome for industry (up by 8.2 percent) 
and services (up by 7.4 percent).  Agricultural output 
declined by 1.7 percent. 
 
3.  GDP FOR 2005:  Central bankers expect high GDP growth 
rates to continue over the course of the next three 
quarters, estimating GDP growth for 2005 at 5.4-5.8 
percent.  The government agreed with the IMF on a revised 
economic program for 2005 which calls for a slightly lower 
real GDP growth of 5.5 percent based on higher oil prices 
and a slowdown in credit expansion. 
 
4.  MODERATE INFLATION:  Despite predicted economic 
expansion, the BNB?s report affirms the government?s 
forecast of moderate inflation of 3.5 percent for 2005. 
The Central Bank, however, cautioned that inflationary 
pressures may increase due to higher oil prices and the 
recent flooding in Bulgaria (reftel.)  Between January and 
June 2005, inflation stood at 1.2 percent. 
 
5.  DECLINE IN CREDIT GROWTH:  The BNB?s report concluded 
that the measures they took earlier this year have been 
successful in moderating credit growth, and will lead to 
the targeted credit growth rate of 30 percent (the IMF 
recommends credit growth rate of 30-35 percent).  The 
growth rate in non-government sector credit slowed to 43.5 
percent in June, five percentage points down relative to 
May 2005. 
 
RISKS: LOWER FDI, HIGHER CURRENT ACCOUNT DEFICIT 
 
6.  Bulgaria continued to attract foreign direct investment 
(FDI) in the first months of 2005; however, it was at a 
lower level - 422 million euro in January-May 2005 - than 
the 483 million euro for January-May 2004.  With 
uncertainty over the completion of planned privatizations 
this year, the government?s expectation of 2.2 billion euro 
in FDI in 2005 ?- of which 900 million euro is to come from 
privatization and 1,300 million euro from green-field 
projects ?- may turn out to be high.  Meanwhile, the 
sizeable current account deficit widened once again in the 
first five months of the year.  The 2005 current account 
deficit may overshoot the government?s projection of 7.6 
percent or 1.6 billion euro.  The current account deficit 
increased by 34 percent, from 943.1 million euro in 
January-May 2004 to 1.26 billion euro in January-May 2005. 
The government?s Agency for Economic Analysis and 
Forecasting has revised upward its projected current 
account deficit to 8.5 percent of GDP. 
 
7.  COMMENT:  Recent economic data indicate that Bulgaria?s 
economy started the second half of the year on strong 
footing.  Analysts believe the political stalemate over the 
formation of a new government is not threatening the 
positive outlook of the Bulgarian economy, but note that 
any delay in EU accession could negatively affect the 
economy.  Political considerations, however, have already 
impeded the successful completion of several privatization 
deals, which could not only overshadow other government 
economic successes, but also restrict Bulgaria?s ability to 
attract new foreign investments.  Meanwhile, trade union 
leaders and business representatives are urging politicians 
to form a stable coalition government, which will secure a 
positive review by the European Commission in the fall, and 
move Bulgaria into the EU in 2007.  END COMMENT. 
 
LEVINE