Macroeconomic Challenges Ahead of Bulgaria

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Macroeconomic Challenges Ahead of Bulgaria

• by
• Tonny Lybek
• IMFs Resident Representative in Bulgaria and
  Romania
• tlybek_at_imf.org
• at
• Bulgaria Economic Forum
• Sofia
• November 27, 2009

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Agenda

• I World Economic Outlook
• Uneven signs of recovery but no time for
  complacency
• II Regional Economic Outlook
• From excessive credit growth to a credit crunch
• III Challenges Ahead of Bulgaria
• IV Conclusion

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I.1 The Global Crisis

• Deepest global recession since the 1930s
• In 2009, world growth is expected to decline (1.1
  percent) for the first time in 60 years!
• International trade declined
• How long will it last?
• Financial shock
• No obvious locomotive
• Positive signs, but no time for complacency!
• Normalization of activity, re-stocking
• Cautious exit of anti-crisis programs
• (http//www.imf.org/external/np/g20/11070
  9.htm)

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I.2 World Economic Outlook
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II.1 Central and Eastern Europe

• The Good Times 200307Catching-up
• Vulnerabilities were building-up!
• Private sector imbalances growing rapidly!
• Increasing current account deficits
• Increasing exposures to Western banks
• Public finances looked much better than they
  were!
• Convergence process not fully appreciated!
• Crisis came late to the region
• Initial denial made it difficult to take early
  action!
• The five stages Denial -gt
• 
  Resentment -gt
• 
  Bargaining -gt
• 
  Depression -gt
• 
  
  Acceptance!
• Impact of the global crisis
• Differed depending on imbalance and cushions!

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II.2 Current Account Deficits Increased
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II.3 Increasing Exposure to Western Banks
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II.4 The Credit Boom Was Fueled by Western
European Banks
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II.5 Much of The Lending in FX
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II.6 Impact of The Global Crisis

• Shock I Lower external demand
• Shock II Slowdown in capital inflows
• Foreign direct investment (FDI)
• Funding ofmainly foreign-ownedbanks!
• Direct borrowing by non-financial companies
• Slow-down in domestic demand
• Delaying investments, particularly construction
• Uncertainty about employment
• Slower wage growth and lower remittances
• Wealth effects (asset prices)
• Some already ripe for a home-grown crisis
• Imbalances differed among CEE countries
• Cushions differed among countries
• IMF has tried to stress differences in the region!

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II.7 Vulnerabilities and Severity of Recessions
Have Varied
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II.8 Regional Economic Outlook
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III.1 Challenges Ahead of Bulgaria

• Maintain macroeconomic stability, i.e. maintain
  of the currency board
• Anchored economic policies and brought stability
• Improve competitiveness through real-sector
  reforms
• Fiscal policy avoid large fiscal deficits
• Continue maintaining financial stability
• Re-ignite growth from non-tradables to tradables

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III.2 Avoid Large Fiscal Deficits

• During the boom years, buoyant revenue
  facilitated fiscal surpluses of around 3 of GDP
• Prudent fiscal policy is precondition for the
  CBA
• Authorities
• 2009 budget Balanced budget
• 2010 budget -0.7 of GDP
• Small deficits are not end of the world, but only
  if
• due to structural reforms of public sector
• due to co-financing due to better utilization of
  EU funds
• etc.

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III.3 Maintain Stability of the Financial System

• Comfortable capital cushions
• CAR 17.3 at end-September
• NPLs likely to increase further
• But good provisioning policies are in place
• Foreign-owned banks remain committed to Bulgaria
  (and the region more broadly)

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III.4 How to Re-Ignite Growth?

• Market-based change from non-tradables to
  tradables sector!
• Improve competitiveness
• Improve productivity
• Public sector reforms
• Business climate
• Nominal wage increases not to exceed productivity
  growth
• Fully utilize EU funds

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III.5 Market Reactions
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IV Conclusion

• Global financial crisis is deep, but has been
  mitigated by coordinated global measures!
• Those with smallest imbalances and largest
  cushions have been least affected
• Bulgaria has weathered the crisis relatively
  well, although impact is severe
• Challenges ahead
• Maintain macroeconomic and financial stability!
• Market-based reorientation towards tradables!

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Thank you very
much for
your
attention