Following the final reporting of economic growth and investment data for 2017, the forecasts for the indicators we expect in 2018 also started. Here you can see the forecasts of several key institutions for the economic growth and investments in Bulgaria, not only at a local level, but also in comparison to the indicators for the region of Central and Eastern Europe.
The European Commission’s outlook
EC sees an economic growth of 3.7% in Bulgaria in 2018 and 3.5% in 2019. As expected, the growth will be due to the economic upturn in the Eurozone as a whole and will affect the whole CEE region. In three countries, Poland, Slovakia and Romania, the forecast is for growth exceeding 4%.
The growth in our country will continue to be mainly enhanced by strong domestic demand. It is expected that the wage growth will boost private consumption and EU funds will further trigger public investment in 2018. Inflation is expected to gradually go up to 1.4% in 2018 and 1.5% in 2019 as a result of international oil prices that will continue to push energy prices up.
Forecast and recommendations by IMF
With its forecast of a 3.8% growth this year and a gradually slowing pace in the coming years to just under 2.8%, the IMF considers turning the continued economic recovery into a sustainable growth the greatest challenge, given the rising costs for the aging population, modest expectations on the volume of new investments and wage growth due to lack of quality personnel in emerging sectors.
According to the Fund, the economy will be boosted by low financing costs, EU funds absorption, decline in non-performing loans and corporate indebtedness as well as alleviated credit conditions. However, a key problem will be the aging population and decreasing productivity of the limited labor force. The IMF recommends excess revenues to be allocated now for costs for the elderly and curricula to be updated and education to be adjusted to business needs through vocational education programs in direct cooperation with companies. In addition, the Fund also recommended public funds to be used more efficiently and the management of state-owned companies to be improved in order to bring the incomes in Bulgaria closer to the average for Europe.
Industry Watch on foreign investment in Bulgaria and CEE
According to the company’s analysts, over the last two years the Bulgarian economy has been approaching a 4% annual growth, with repeatedly shrinking foreign investment, compared to the pre-crisis period. Economic growth is made possible despite the limited inflow of foreign capital due to accumulated domestic savings during the crisis years and the booming growth of some sectors, such as outsourcing and industrial production. The remaining CEE countries have also achieved high economic growth, despite the overall decline in foreign investment.
Industry Watch expects that the Bulgarian economy will also continue to grow at the same rate of around 4% a year in 2018, even without an increase in foreign investment in the country. The company also points out that shrinking foreign investment is not an isolated phenomenon for Bulgaria, but also for the whole Central and Eastern Europe. Bulgaria ranks 6th out of 9 countries in the region in terms of foreign investment, lagging behind Estonia, the Czech Republic, Croatia, Poland and Romania. Our northern neighbor has left us behind in terms of foreign capital inflows for the first time in 18 years.
BNB on 2017 investments
According to preliminary data of BNB, foreign investment in Bulgaria reached EUR 901.9 million (1.8% of GDP) in 2017, an increase by EUR 241.9 million (36.7%) compared to 2016 (EUR 660 million, 1.4% of GDP). The largest foreign capital inflows were registered in the trade, finance, manufacturing and real estate sectors.
The Netherlands is again a leading investor in the Bulgarian economy, as this also includes Bulgarian capital or capital from other EU countries, due to the attractive tax regime of the Netherlands. The next in terms of investment in our country are Switzerland and Germany. The largest is the share of proceeds in the form of debt instruments and the money is usually used for modernization. The final analysis after companies submit their financial statements is expected to show that the investments come rather from companies that are present on the Bulgarian market and expand their business, than from new foreign investors.
As a whole, analysts are at one on a few general conclusions. EU funds offset to a great extent declining private foreign investment. According to data from the Ministry of Finance, the EU funds raised Bulgaria’s GDP by 1.7% in 2017 and their absorption accounts for more than half of the projected growth for the period 2018-2020. It is still controversial how our economy should prepare for a possible tough period after 2020, if EU funds decline, the European Central Bank raises interest rates and bank credits become more expensive, as well as if the economic gap between the major cities in Bulgaria /Sofia, Plovdiv, Stara Zagora, Varna and Burgas/ and the rest of the country deepens.
The lack of balance between supply and demand on the labor market is also expected to lead to wage increases in all major sectors of the economy in 2018, with a 10% increase in wages in 2017. The Institute for Market Economics expects even higher growth this year, from 15-20%, but this will only be possible if the economy accelerates its growth so that companies can afford the increase. Most analysts also forecast the inflation to go up due to enhanced domestic demand and the expected wage growth.
The sectors that are seen to grow are construction, information technology, tourism. Outsourcing companies may face with forced slowdown due to lack of sufficient hiring experts. The economic upturn in the Eurozone and intensified international trade will boost export-oriented companies.