The World Bank raised its GDP growth forecast for Bulgaria to 3.2% in 2019 in its latest Migration and Brain Drain report, up from 3.0% projected in June. The WB also upped the economic growth projections for 2020 and 2021 to 3.0% and 3.1%, respectively, while in June it expected 2.8% growth rate for these years. The WB’s forecast nevertheless remains the most pessimistic among other IFIs, as the EC and the IMF expect 3.3% GDP growth in 2019 and the government — 3.4%.
Bulgaria’s economic growth was expected to stay above the EU average over the mid-run, but a slowdown was forecast to take place in H2 and in 2020 due to deteriorating external environment and its negative effect on exports. Final consumption will continue to be the main economic growth driver in H2, on the back of solid increases in employment and salaries, as well as pension hikes, the WB said. The WB also projected investment growth to pick up in H2 given the local election on Oct 27 and the purchase of F-16 fighter jets. The approaching end of the current EU program period is another factor which will boost investment in the mid-run, according to the report.
The fiscal position will deteriorate in 2019 due to the purchase of the military aircraft, but was expected to improve again in 2020. The current account balance will stay in the positive territory in mid-run but will narrow in 2019 compared to 2018 as summer tourist season was weak and exports will ease in H2, the WB noted.
The main risks to Bulgaria’s outlook are mostly related to potential external environment shocks, such as the global trade conflicts, the WB said. On the domestic side, the strengthening of lending activity, especially in the household segment, was seen as risky as well, as it raised concerns about a potential new increase in non-performing loans. High income inequality remained another factor weighing on the growth inclusiveness and poverty, according to the WB. The WB noted that income inequality in Bulgaria has been increasing and is the highest in the EU measured by the Gini coefficient.
The WB commented that Bulgaria’s aspirations for ERM-II entry might be postponed given the ECB’s findings that FiBank and Investbank faced capital shortfalls under different scenarios.