Analysis of the Current Situation and Prospects for the Bulgarian Economy

Analysis of the Current Situation and Prospects for the Bulgarian Economy

2005-2009

May 2010

Summary

This analysis objective is to draw an overview of the Bulgarian economy according to major macro economic criteria and come up with a prognosis for development in the forthcoming five-year period. It contains basic macro economic indexes for the current economic situation in Bulgaria in the period 2005-2009 and encompasses the real, fiscal, financial and internal sectors.

The first section sums up the document basic objectives and its relation to the other analyses. The analysis contributes to the project objectives fulfillment in several respects by touching upon the following:

•Itresearches branch structures and sectors, contributes to the Bulgarian National Standard (BNS) and the GDP, number of employees, sales and forecasting sector development, investment activity, capital load and indebtedness;

•studiesexporttendenciesinviewofbasicproducts;

•overviewsdevelopmentprospectsandkeyprojectsinbasicsectors, summarizesmunicipalstrategiesandregionaldevelopmentplans;

•projects expected impact on employment in the basic sectors and regions;

•developscriteriaforselectingkeysectorsandregionsofhighimportanceandpotentialfordevelopmentby 2015-2020;

•touchesuponthe20-25 basicsectorsand 10-15 regionsselectedtobefurtherstudiedandincludedinthecompetenceassessmentnetworkoftheworkforceCompetenceAssessmentSystem (CASSY).

Theresultsshallassistthenextstageofshortlistingpromisingeconomicsectorsandregions, aswellasselectingenterpriseswheresurveysare tobeconductedasa crucial part ofCASSYdevelopment concept.

Section 2 outlinesthemethodologyusedinconductingtheanalysis, aswellasadescriptionoftheappliedmethodsandinformationsources. Statistics and existing analytical sources have been used for analyzing Bulgaria’s economy at a macro level by means of summarized indexes. Macroeconomic idiosyncrasies determine the specific methodologies and methods used in the macroeconomic analysis. Its basic principles are: use of aggregated indexes; analysis of correlations occurring among national economic sectors within market and non-market economic relations with direct impact on the price and non-price factors of the respective relations; research and analysis of equilibrium values; applying the principles of positive and regulatory economy with regard to macroeconomic processes, rectification of basic macroeconomic factors by considering the changes in price levels.

Basictoolsfor researching macroeconomic processes are modeling and the economic model in particular. Another instrument used in the analysis is the integrated matrix of financial fluxes, which has been applied as a complex macroeconomic model.

The analysis studies the econometrical dependencies based on statistics about the Republic of Bulgaria and the world tendencies, investment influxes, foreign trade, technological update; the development of a macroeconomic model for forecasting financial factors based on the balanced relations and methods for time series analyses.

Someoftheinformationsourcesare: NationalStatisticalInstitute (NSI), theBulgarianNationalBank (BNB), MinistryofFinance (MF), Ministryof Economy, Energy and Tourism (MEET), Agency for Economic Analyses and Forecasting (AEAF), Employment Agency (EA), National Customs Agency (NCA), rating agencies, data bases of our own, international organizations data bases (the World Bank, International Monetary Fund, United Nations, International Trade Center in Geneva etc.), the mass media.

Section 3 discusses the basic indicators of the Bulgarian economy and analyzes the macroeconomic indexes. It studies the tendencies in the GDP variation, GVA, the relative industrial shares, agriculture and services. Special emphasis is laid on the factors affecting the GDP changes. Tendencies for development in the short term are forecast, as for example the Bulgarian economy to show indications of growth and recovery at the end of the year.

The study of the foreign sector aims at presenting steady tendencies in the Bulgarian export with regard to the world export and at the same time identifying new product groups which quickly gain market share. These objectives determine the main two groups of study, namely, goods of constantly expanding export in certain time periods and goods which are selected based on export growth and destination. In order to assess the place of every product direction on the world market,export and import data about all goods and all countries is used. Currently, the only universal currency for measuring volumes of values is the US dollar.

The Harmonized Commodity Description and Coding System (HS), more popular as tariff nomenclature, has been selected in view of juxtaposition. According to present international regulations, all members of the World Trade Organization use unified commodity numbers for the first six numbers of the code. Even though in several cases there is access to more detailed statistics (at the eight and tenth place), it is not used both because it could consider different commodities and because of the project objectives, part of which is the present document.

Resting on the data studied, a coefficient of local export growth (CLER) is calculated: the average Bulgarian export growth in relation to the average world import growth equals 1.53. Product directions and the respective commodity groups exhibiting a coefficient higher than 1.53 offer local advantages for outstripping export growth and an increasing market share in world trade. In a coefficient descending order, some of them are: Chapter 51 Wool, animal fiber; yarns and fibers – CLER 10.0; Chapter 55 Staple synthetic or artificial fibers–CLER 4.50; Chapter 70 Glass and glass products – CLER 4.45; Chapter 90 Optical, photographical, cinematographic, measuring, controlling and specifying instruments and devices; medical and surgical instruments and devices; spare parts – CLER 4.20; Chapter 17 Sugar and sugary products – CLER 4.17; Chapter 87 Automobiles, tractors, motorcycles and bicycles; spare parts – CLER 3.45; Chapter 30 Pharmaceutical products – CLER 3.14 etc.

The macroeconomic study of the Bulgarian economy has shown that the upsurge in the period 1998-2008 is due to the use of the existing production capacities, certain workforce resources and direct foreign investments, which paved the way for economic growth at an irregular pace, accumulation of funds and deformation within the construction sector, financial mediation and the related fields. Self-funding, low capitalization of the banking system and lag from the development of the corporate bonds market obstructed a more eager use of national savings.

Considering the expected workforce cut down, a more palpable investment increase in the economy modernization is necessary. The economic growth in the recent years has been irregular in terms of sector and regional aspect. Generally, several stages can be highlighted. These are the following:

1998-2005:a gradual expansion of the internal market.Asidefromthegradualexportgrowth, another important factor of economic development is the internal demand increase. This increase in its essence is not fully “recoverable” because only the GDP volumes are being recovered (the industry failed to reach the pre-market period levels) under a completely different economic structure. Major impediments to the further economic development occurred towards the end of the period, such as inadequate infrastructure, competitiveness dip in the manufacturing industry etc.

2006-2008:growth acceleration – a “compensating” investment stage. There was a significant speed upof investment growth rate, including direct foreign investments. However, the basic capital bulk (about 60%) is directed towards the real estate sector, construction and financial mediation.

End of 2008–2009 and presently – a period of recession. The recession outburst in the economically developed countries and specifically among our major trading partners (the EU), has incurred a production and export decrease.This has seriously affected the economic growth, leading to cut down of production volume in a number of sectors in the Bulgarian economy, as well as a significant decrease of investment activity.

Theshorttermforecastsforthedevelopmentof the companies in the country expect a more cautious investment polity to take place, accompanied by a moderate financial expansion, which shall bring about an investment growth rate, slower than the pre-crisis one. The growth in potential production shall be limited by the lower surplus of the production capital in the economy.

Some of the basic factors affecting the overall productivity are the investments and human capital. The faster unemployment turns into employment, the lesser human capital loss occurs. Unemployment growth isincurred mostly by the short-term unemployed people, laid off because of the crisis. Another intensifying factor is the people who remain unemployed for over six-month period, along with the skyrocketing number of discouraged people. Thisdynamictendencybears a potential danger of worsening the respective employees’ skills.

It is expected that the economy restructuring, stemming from the crisis, shall exert a positive impact on the dynamics of the overall productivity by causing the survival and recognition of the sturdy enterprises only. Simultaneously, there is a danger of a lower labour and capital effectiveness, due to the crises.

The insecurity concerning the influxes of direct foreign investments and a potential innovative company policy bears a risk of inability to implement new technologies.

The available information leads to a conclusion that the economic policy should be directed towards overcoming the negative risks pending over potential productivity dynamics and closely related to population aging, fostering favourable conditions for private investments and enhancing productivity.

Section 4 introduces a specifically prepared methodology for index formation which shall determine the ranking of the economic branches in the country based on their potential to lead the country out of the crisis and to open new job places according to the expected world economy development, national priorities and tendencies, and the forecasted requirements of necessary new labour market knowledge and skills.

Branch ranking has been done based on a complex index formed by global and national tendencies. Themaintendenciesaremodeledafter the investment growth rate in the economic sectors (branches), export alteration rate, degree of technology update. Data is obtained from international sources such as UN Statistics Division and the InternationalTradeCenter in Geneva.

The national priorities index is based on qualitative and quantitative indicators. The quantitative criteria include a production growth rate, export growth rate, investment growth rate, employment growth rate, indebtedness decrease rate. The qualitative criteria include the branch natural advantages, potential to lessen energy-intensity, potential to increase export and decrease import (degree of import substitution), potential to shrink the harmful effects on environment, potential to increase general productivity, and the potential for technological update.

The analyzed sectors have been divided into six groups, each group assigned a mark from 0 to 5, based on their number and statistical probability of variations and errors.

The indicators have been grouped and the integral index calculated versus the maximal sum of the separate indicators, i.e. 1 (one) is considered the best index, referring to the most advanced and promising sectors. The indicators are not loaded with additional burden. The ratio between national priorities and world tendencies is 50:50.

The regions have been selected by positioning branches in the separate regions according to the quantitative criteria exhibited in the recent years (2005-2009), evaluating the indicators obtained and ranking. Some of the major selection criteria are: the value added share out of the country’s total one, employment growth rate and the region development degree. Special attention is paid to the branch projection in regions based on the following factors – workforce, natural resources, infrastructure etc.

Section 5 applies the described methodologies for ranking and positioning of branches in the regions. Forming the complex indexes is done by first analyzing primary data about the world tendenciesin investments, export, and technological development by economic sectors. The national priorities index,built up of qualitative and quantitative indicators, is set up in the same way.

Having applied the above mentioned methodology, the first thirty branches are listed as follows: Computer programming, consultancy and related activities (code 62 in the European Classification of Economic Activities 2008); Manufacture of computer, electronic and optical products (26); Electricity, gas, steam and air conditioning supply (Section D); Manufacture of basic pharmaceutical products and pharmaceutical preparations (21); Manufacture of chemicals and chemical products (20); Waste collection, treatment and disposal activities; materials recovery (38); Food and beverage service activities (56); Construction (Sector F-41, 42, 43); Manufacture of machinery and equipment n.e.c. (28); Manufacture of electrical equipment (27); Agriculture, forestry and fishing (Sector A-1, 2, 3); Accommodation (55); Sewerage (37); Remediation activities and other waste management services (39); Manufacture of furniture (31); Manufacture of basic metals (24); Manufacture of food products (10); Manufacture of other non-metallic mineral products (23); Water collection, treatment and supply (36); Manufacture of wood and of products of wood and cork, except furniture; (16); Manufacture of rubber and plastic products (22); Other mining and quarrying (8); Manufacture of paper and paper products (17); Manufacture of fabricated metal products, except machinery and equipment (25); Air transport (51); Extraction of crude petroleum and natural gas (6); Mining of coal and lignite (5); Financial and insurance activities (Sector K – 64, 65, 66); Manufacture of wearing apparel (14); Manufacture of beverages (11).

With regard to the regions, the section dwells on the initial and processed information in a form of indexes. The obtained individual indexes of gross value added, the average employment growth rate and the human development index have been normalized towards the best indicators of the respective group in order to avoid inside disproportions and distortions, enclosed in the information bulk. The total sum of the three normalized indexes of each indicator has given the general index. Ranking has been done in descending order based on this index.

This methodology presupposes district ranking by 15 as follows: Burgas; Stara Zagora; Blagoevdrad; Sofia cap.; Vratsa; Plovdiv; Varna; Shumen; Veliko Tarnovo; Ruse; Pleven; Dobrich; Targovishte; Lovech; Gabrovo.

Section 6 proposes regulation amendments with regard to the e-government implementation, investment encouragement, build-up and use of RES, projects implementation and effective and justifiable utilization of funds from the operational programmes.

Section 7 wraps up the conclusions and information drawn from the analysis.

Section 8 consists of the bibliography used, while Section 9 encompasses all appendixes. The latter include tables of time series of macroeconomic indicators for the period 2005-2009, calculating tables for applying methodologies, including normalized and integral indexes. In addition, information about and definition of basic concepts, which can be used in the project, especially of “branch” and “region” has been included.

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