10% 0,4% 0,8% 0,5% - rbb.bg · rate was stronger compared to thеse, registered in the last two years. Meanwhile, on average for the last 12 months as of September, the same indicator

1

October 2013

Analysts:

Hristiana Vidinova

[email protected]

Boryana Yosifova

[email protected]

Highlights

In July and August industrial and construction production continued the negative

trend and posted average declines in these two months by 2.4% yoy and 8.1%

yoy. No signs auspicate a positive change in the following few months.

Meanwhile, improvement was marked by trade on the external and domestic

markets. On average for July and August the real growth rate of retail trade

accelerated to 5.0% on an annual basis, while nominal export stepped up by

8.0% yoy.

Inflation posted a positive monthly value in September, albeit at a marginal rate of

0.1%, thus discontinuing the deflationary process, which started in March. Annual

average inflation remained positive (2.3%) and, similarly to the previous few

months, followed a downward trend.

The seasonally adjusted unemployment rate stabilized at a level of 13.1% in the

period July-September. Some deterioration could be expected by the end of the

year.

In September the budget balance was again negative – at the amount of BGN

147.8 mn. Cumulatively from the beginning of the year the fiscal deficit reached

BGN 360.5 mn (0.5% of the annual GDP forecast by Raiffeisen RESEARCH), but

remained significantly below the envisaged deficit for the whole 2013.

The fiscal reserve stepped up by BGN 248.0 mn in September, mainly due to a

domestic government bond emission, and amounted to almost BGN 5.0 mn as of

the end of the month. By the end of 2013 the government is expected to undertake

a foreign loan at the amount of EUR 360 mn, which will support the fiscal reserve.

In the same month, credit activity realized an improvement – the total amount of

loans picked up by BGN 241.2 mn, compensating for the decline of 202.2 mn in

August. Nevertheless, the annual rate of growth remained low (0.7%), notably

losing momentum compared to the previous few years.

Bad and restructured loans decreased by BGN 12.8 mn in September, while their

share in total loans (excluding overdraft) remained unchanged at 22.9%.

Similarly to the previous three months, deposits stepped up by an accelerated pace

in September – by 1.5% (EUR 711.0 mn). As a result, the annual rate of deposit

growth reached 7.4%.

The current account balance faced a record-high surplus of EUR 884.4 mn. It

resulted from positive services and income balances, while the improvement

stemmed from an untypically high, also positive, trade account.

Cumulatively for the period January-August the balance on the current account

reached EUR 1.3 bn (3.1% of the expected annual GDP). It exceeded all values

registered in the same period of the preceding years for which data is available.

Similarly to the current account, the financial account also posted a relatively high

flow in August, but an outgoing one (EUR -567.9 mn), mainly due to an outflow of

currency and deposits.

6,5% 6,4% 6,2%

-5,5%

0,4%1,8%

0,8% 0,5%

2,0%

7,3%

8,4%

12,3%

2,8% 2,4%

4,2%3,0%

2,0%3,4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013e 2014f

Real GDP (% yoy) Consumer prices (avg, % yoy)

21,6%

17,2%

13,7% 14,6%16,2% 16,3%

18,5% 17,8%19,4%

3,4% 3,3% 2,9%

-0,9%

-4,0%-2,0%

-0,5%-2,1% -1,8%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012 2013e 2014f

Public debt (% of GDP) General budget balance (% of GDP)

2

Real sector

Figure 1: Industrial production (yoy growth,

%)

Source: NSI, Raiffeisen RESEARCH

Figure 2: Construction production (yoy

growth, %)


Figure 3: Permits issued for construction of

new buildings (gross building area, sq km

and % yoy)


Figure 4: Permits issued for construction of

new buildings (annualized gross building

area, sq km.)


The trends from the second quarter

continue in July and August

In July and August industrial and construction production continued to develop

negatively, while domestic and foreign trade registered a further improvement. So

far, the observed data do not impose a significant change in Raiffeisen RESEARCH

forecast for a minimum positive economic growth in the third quarter.

Industrial production continued to decline: on average for July-August it contracted

by 2.4% yoy. Negative dynamics decelerated slightly compared to the second

quarter, when industrial output shrank by 4.1% yoy. According to data on

industrial turnover, sales on the domestic market faced a larger drop in July -

August, while those on the external market realized a slight increase compared to

the same period of the previous year.

The manufacturing industry noted a marginal rate of increase - an average by

0.5% compared to July-August 2012 and, accordingly, had a marginal

contribution to limiting the fall in industrial production. The positive manufacturing

growth rate was due to an increase in July, but so far no evidence of sustained

improvements in its development is present. The largest positive contribution to the

dynamics of the manufacturing industry was brought by the manufacture of basic

metals and fabricated metal products, which stepped up respectively by 9.2 and

13.0%. Increases were also recorded in the production of investment goods,

including electrical equipment (9.6% yoy), motor vehicles, trailers and semi-trailers

(22.1% yoy), computer and communication equipment, electronic and optical

products (13.4% yoy). Meanwhile, manufacture of food products brought the

largest negative contribution to the dynamics of the manufacturing industry,

because it has a relatively large share in the industrial sector and shrank by 4.3 %

compared to July-August 2012.

The decline in industrial production in these two months was mainly due to the

production and distribution of electricity, heat and gas, which decreased by 7.1%

yoy. Output of mining and quarrying also declined: by 12.2% yoy.

As of the end of August, the highest proportion of firms in the industrial sector

pointed to the uncertain economic environment and weak domestic demand as

factors hindering their economic activity. According to а business survey,

conducted by NSI, these factors remained with а leading importance to the

industrial development as of October. Therefore, no significant change to the

unfavourable output trend is expected as of that month. However, improvement

could be present in the last months of 2013, driven by orders from the external

market, stimulated by the EU recovery.

The decline in construction accelerated from an average of 5.9% yoy in the second

quarter to 8.1% yoy in July and August. By sub-sectors, civil engineering marked a

stronger contraction: 10.1% yoy.

Gross building area of new buildings, for which permits were issued in the third

quarter of 2013 stepped up of 12.3 % over the same period of 2012. This growth

rate was stronger compared to thеse, registered in the last two years. Meanwhile,

on average for the last 12 months as of September, the same indicator also

improved on an annual basis. However, the latter represented a compensation of

the deterioration at the end of 2012, rather than a process of recovery to the levels

prior to the recession in 2009. In other words, the data on building permits

indicates an end of the trend of deterioration, observed in the recent months in line

with the recession in the EU, but signs of recovery of the construction sector from

the crisis in 2008-2009 have not been present yet.

The dynamics of domestic trade improved significantly during the summer months.

On average for July and August trade turnover expanded in real terms by

-30

-20

-10

0

10

20

І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ

2009 2010 2011 2012 2013

Mining Manufacturing

Electricity, gas, air condit. supply Industry-total

-50

-40

-30

-20

-10

0

10

20

30

40

І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ

2009 2010 2011 2012 2013

Consrtuction - total Civil engineering Building construction

38,8

22,4

13,6

22,9

-3,6

-18,1-8,3

-29,9-32,1

-50,4-53,8

-58,8

-52,6

-20,0-20,6-21,0

18,1

-17,2

7,7 9,5

-23,4

3,2

-14,9 -17,1

0,77,7

12,3

-60

-40

-20

0

20

40

60

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2007 2008 2009 2010 2011 2012 2013

sq. km %, rhs

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

I III I III I III I III I III I III I III I III I III I III I III

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

3

Real sector

Figure 5: Trade turnover in constant prices

(% yoy)


Figure 6: Retail trade turnover in current

and constant prices (% yoy)


Figure 7: Export of goods (nominal growth,

% yoy)


8.2% yoy. Moreover, the growth rate accelerated compared to the second quarter,

when the reported figure was 1.7% yoy.

For the same two months wholesale trade, excluding motor vehicles and

motorcycles, increased significantly - by 10.2% yoy. The latter resulted from a

dynamic growth in the wholesale of agricultural raw materials, livestock, consumer

goods and telecommunications equipment.

Retail sale also marked a favourable development. On average for July-August the

volume of retail turnover stepped up by 5.0% compared to the same period of

2012, gaining momentum vs. the reported pickup by 1.4 % yoy in the second

quarter. Retail sale of food, beverages and tobacco rose in real terms by 10.1%

yoy, compared to only 0.8% yoy increase in April-June. The annual growth pace of

retail sale of textiles, clothing, footwear and leather goods reached 23.1% on

average in July and August.

Nevertheless, in these two months the dynamics of retail trade in

telecommunications equipment remained unfavourable (posting a real decline by

2.9% yoy). Meanwhile, the volume of retail trade in household appliances,

furniture and other household goods moved to positive territory, posting a 2.6%

yoy growth, after it had been falling for almost all months since the end of 2008.

The gradual decline in annual inflation since the beginning of 2013 and its

transition to negative territory as of August underpinned household purchasing

power and contributed positively to the realized real growth of retail turnover.

In addition to domestic trade, external trade also continued to develop favourably

in July and August. Exports of goods increased nominally by 8.0 % yoy on

average for these two months, and its dynamics accelerated vs. the 3.3 % growth

in the second quarter. The observed positive and increasing growth in the summer

months resulted from an increase in exports to countries outside the EU, whose rate

reached 14.0% yoy. The latter was due to the EU rebound from the recent

recession and, hence, due to the demand for imported goods by the EU countries.

For comparison, in 2012 Bulgaria’s exports to member states declined by 3.5%,

due to the weak EU economic activity.

-50

-40

-30

-20

-10

0

10

20

30

40

І ІV VІI X І ІV VІI X І ІV VІI X І ІV VІI X І ІV VІI

2009 2010 2011 2012 2013

Wholesale trade Trade with motor vehicles

Retail trade Trade - total

-20

-15

-10

-5

0

5

10

15

20

25

30

35

І ІV VІІ X І ІV VІІ X І ІV VІІ X І ІV VІІ X ІV VІІ X I ІV VІІ

2008 2009 2010 2011 2012 2013

Current prices Constant prices

-20

-10

0

10

20

30

40

I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII

2012 2013

EU Non-EU Total

4

Inflation and labour market

Figure 8: Monthly inflation rate (%)


Figure 9: Contributions to the cumulative

inflation rate for January-September (p. p.)


Figure 10: Producer prices in the industrial

sector (%)


Marginal positive inflation in September

Stabilization of the unemployment rate

The deflation trend, which was observed during the current year, discontinued in

September. The monthly inflation was positive for the first time from February

2013, although at a marginal rate of 0.1%. Food prices faced a seasonal rise (by

1.0 % mom) and therefore had a positive contribution to the change of the overall

price level. The biggest price increase was marked by vegetables (10.6% mom),

while the products coffee, tea, cocoa, milk and milk products, eggs, meat and

meat products posted rises in the range of 0.5-1.0% mom. Meanwhile, a

significant decline of 4.3% was recorded in the prices of animal and vegetable oils

and fats.

Services prices decreased by 1% compared to August, which almost entirely offset

the effect of the rise in food prices, and therefore left the price level almost

unchanged compared to the previous month. Package holidays and travel services

marked the most significant monthly price drops (correspondingly by 18.8% and

11.6%), which stemmed from cheaper offers in the end of the tourist season. As for

the other services, most of them scored price increases, albeit less dynamic ones:

education (excluding tertiary ) (2.4% mom), repair of furniture , furnishings and

floor coverings (1.7% mom), repair of household appliances (0.4% mom),

maintenance and repair of personal transport equipment (0.4% mom), domestic

services (0.4%), etc.

On average in the group of non-food prices, no change in the price level was

observed compared to August, but for individual commodities there were

movements. Similarly to the previous month, gaseous fuels became more expensive

(by 1.8% mom), and the prices of fuels and lubricants for personal transport

equipment continued to rise (0.7%). As a consequence, these changes had a

positive contribution to the change in the price level during the month. Meanwhile,

price dynamics in the opposite direction were marked by equipment: photographic

and cinematographic equipment and optical instruments (down by 1.3 % mom),

recording media (down by 1.0% mom), information processing equipment (down

by 0.9% mom) and equipment for the reception, recording and reproduction of

sound and picture (down by 0.6% mom).

In catering there was a marginal deflation of 0.1% compared to August, but this

change did not impose a significant effect on the overall price level.

Since the monthly inflation was minimal, as of September the annual inflation rate

remained in negative territory. It reached -1.6% vs. -0.7% in August and it should

be noted that so high annual-based deflation rates have not been reported since

1999. Most significant contributions to the annual price level decline were brought

by services (-1.1 p.p.), followed by non-food products (-0.6 p.p.) and foods (-0.1

p.p.) On the one hand, the deflation process is related to the fact that economic

activity lags behind its potential, and is particularly influenced by the weak

domestic demand. On the other hand, the low international prices and declines in

administrative price also contributed to the observed deflation in 2013.

In contrast to March-June, when industrial producer prices were stepping down, as

of the end of September they remained unchanged compared to the previous

month. Therefore, no pressure towards consumer deflation is expected in the

following months on the account of producer prices. This, combined with a

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

I III V VII IX XI I III V VII IX XI I III V VII IX

2011 2012 2013

Inflation Seasonally adj. inflation, 12-month moving average

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

Foods Non-foods Catering Services

-2

0

2

4

6

8

10

І ІІ ІІІ ІV V VІ VІІ VІІІ ІX X ХІ ХІІ І ІІ ІІІ ІV V VІ VІІ VІІІ ІX

2012 2013

Monthly growth Annual average growth

5

Inflation and labour market

Figure 11: Annual average inflation rate

(%)


Figure 12: Unemployment rate (seasonally

adjusted, %)

Source: Eurostat

Figure 13: Unemployment rate in the EU

countries1 in September 2013 (seasonally

adjusted data, %)

Source: Eurostat

1 Data on Estonia, Greece, Latvia, Hungary

and United Kingdom is not available

seasonal rise in prices in the last quarter of the year, is expected to result in

positive and significant monthly values of inflation to be reported by the end of

2013.

In contrast to the monthly and yearly-based inflation, the annual average rate

remained positive as of September, mainly due to price level increases in late

2012 and early 2013. However, due to the deflationary pressures, average

annual inflation has been falling and this trend is expected to continue until the end

of the year. In September its rate amounted to 2.3%, falling from 3.5 % at the end

of H1 2013 and 2.9 % in August.

***

In July-September the seasonally adjusted unemployment rate stabilized at 13.1%,

according to Eurostat data. As of September, the unemployment rate remained

above the average rate in the EU 28. The latter amounted to 11.0%, similarly to

almost all other months since the beginning of 2013. Although the September

unemployment rate in Bulgaria was the highest for the past ten years, as a positive

fact should be accounted that the rising trend in the unemployment coefficient,

which began with the recession in the country, has discontinued.

However, the decline in GDP, firms’ precautionary behaviour and the fall in profits2

that were observed in April-June, can be expected to affect the labour market by

the end of 2013, taking into account that the labour market usually reacts by a lag

to the domestic economic activity. Similarly, a noticeable improvement in the

labour market can be expected in the second half of 2014, as a result of the

predicted acceleration of economic growth in late 2013 and early 2014.

2 According to NSI data on GDP, gross operation surplus and mixed income for Q2 2013 and annual-

based rates of growth

0%

1%

2%

3%

4%

5%

I III V VII IX XI I III V VII IX XI I III V VII IX

2011 2012 2013

0

2

4

6

8

10

12

14

16

18

20

1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

Au

stri

a

Ge

rma

ny

Lu

xe

mb

ou

rg

Ma

lta

Cze

ch

Re

pu

bli

c

Ne

the

rla

nd

s

De

nm

ark

Ro

ma

nia

Sw

ed

en

Fin

lan

d

Be

lgiu

m

Slo

ve

nia

Po

lan

d

EU

28

Fra

nc

e

Lit

hu

an

ia

Ita

ly

Bu

lga

ria

Ire

lan

d

Slo

va

kia

Po

rtu

ga

l

Cy

pru

s

Cro

ati

a

Sp

ain

6

Fiscal sector

Figure 14: Consolidated budget cash

balance by months (BGN mn)

Source: MoF, Raiffeisen RESEARCH

Figure 15: Structure of the budget revenues

in September 2013 (%)


Figure 16: Structure of the budget

expenditures in September 2013 (%)


Figure 17: Cumulative revenues and

expenditures for January-September by

years (BGN bn)


Budget deficit of around BGN 150 mn in

September

Domestic bond emission boosts the fiscal reserve

In September, the budget balance was again negative - at the amount of BGN

147.8 mn. Cumulative from the beginning of the year the budget deficit reached

BGN 360.5 mn (0.5% of the projected Raiffeisen RESEARCH GDP for 2013). In

comparison to the first nine months of 2012 the budget balance diminished by

BGN 608.6 mn. However, having in mind the envisaged budget deficit of BGN

1.6 bn for the whole year, neither the negative monthly balance, nor the decline

on an annual-basis, was unexpected. More precisely, it can be said that the

execution of the planned budget deficit in the recent months has been kept

relatively slow, probably in consideration with the amount of the fiscal reserve, and

hence a large part of the envisaged expenditures can be expected to be

concentrated in the last months of the year.

During the month revenues and grants amounted to BGN 2.3 bn, increasing by

BGN 133.9 mn (6.1%) compared to September 2012. Their dynamics

decelerated vs. August when an annual growth of BGN 178.5 mn (8.1%) was

recorded. By components, tax revenues and grants posted the largest increases

compared to September 2012 - respectively by BGN 105.6 mn (6.2% ) and BGN

111.7 mn ( 80.4%). A part of the positive annual change was offset by a decline

in non-tax revenues - by BGN 83.5 mn (24.7%). Cumulatively for the first nine

months of 2013 revenues and grants amounted to BGN 21.3 bn, stepping up by

BGN 1.3 bn (6.6%) compared to the same months of 2012. For January-

September non-tax revenues remained almost unchanged compared to a year

earlier, while tax revenues rose by BGN 529.5 mn (3.3%). Nevertheless, the

negative annual inflation as of September, as well as the weak economic activity in

the country, has been limiting the amount of tax revenues. With regard to grants, a

major increase by BGN 718.3 mn (62.6%) was marked.

In September, budget expenditures totalled to BGN 2.4 bn, exceeding the amount

of revenues by BGN 75.4 mn. The rest of the deficit was formed by the

contribution of the government to the EU budget, at the value of BGN 72.4 mn.

The annual expenditure growth during the month posted one of the most sizeable

expansions from the beginning of 2013: BGN 416.4 mn. Capital expenditures

and also social expenditures and contributions were the main two expenditure

items, behind the overall expenditure increase over September 2012. They

stepped up respectively by BGN 233.4 and BGN 98.7 mn and could be expected

to stimulate domestic demand in the economy.

Cumulatively for the first nine months of 2013, budget expenditures reached

around BGN 20.9 bn, while the contribution to the EU budget totalled to BGN

747.1 mn. Compared to the same period of 2012, expenditures rose by BGN 1.8

bn (9.5%), i.e. more dynamically than revenues did. Social costs and scholarships

faced the largest annual-based increase: by BGN 638.3 mn (7.2%), which is

probably mainly related to the higher unemployment rate in the current year. Of

relatively smaller sizes, but also increases over January-September, were reported

in the capital expenditures (by BGN 276.8 mn), wages and salaries of the staff (by

BGN 244.3 mn) and social and health insurance contributions (by BGN 231.0

mn).

-1 000

-800

-600

-400

-200

0

200

400

600

I II III IV V VI VII VIII

Monthly balance, 2012 Monthly balance, 2013

Cumulative balance, 2012 Cumulative balance, 2013

78,1%

11,0%

10,8%

Tax revenues Non-tax revenues Grants

15,0%

4,6%

14,3%

1,5%45,2%

3,8%

15,6%

Wages and salariesSocial and health insurance contributionsMaintenanceInterestsSocial expenditure and scholarshipsSubsidiesCapital expenditure and net state reserve gain

0

2

4

6

8

10

12

14

16

18

20

22

2011 2012 2013

Revenues and grants Expenditures Contribution to the EU budget

7

Fiscal sector

Figure 18: Fiscal reserve (BGN bn)


In September, the fiscal reserves stepped up by BGN 248.0 mn and amounted to

nearly BGN 5.0 bn. During the month the government issued one-year treasury

bonds worth BGN 300 mn, at 0.6% yield, which was the main reason for the

pickup of the fiscal reserve.

In the last quarter of 2013 a budget deficit of BGN 1.2 bn is expected, in order

the planned annual deficit of BGN 1.6 bn to be executed. A part of the deficit is

expected to be funded from the fiscal reserve, which in September stood at about

BGN 500 mn above its minimum allowed value of BGN 4.5 bn for the end of

2013. The remaining amount, needed for financing of the deficit is expected to be

provided by an external long-term loan. Until the end of the year the government is

expected to borrow EUR 360 mn, in Schuldschein3 instrument, for which Raiffeisen

Bank International and Deutsche Bank are intermediaries.

3 a debt security (in the form of note), typical for the German market

0

1

2

3

4

5

6

7

8

9

10

I IV VII X I IV VII X I IV VII X I IV VII X I IV VII

2009 2010 2011 2012 2013

8

Monetary sector

Figure 19: Contributions to the annual

growth of M3 (p. p.)

Source: BNB, Raiffeisen RESEARCH

Figure 20: FX coverage of the monetary

base and M3 (%)


Again positive net bank financial assets

Positive lending growth in September

In September, the money supply (M3) increased by 0.7% on a monthly basis,

slowing down from 1.5 % growth in August. Deposits redeemable at notice up to 3

months posted the largest contribution for this dynamics as they stepped up by

3.0% mom. The monthly pickup in M3 was also driven by deposits with agreed

maturity up to 2 years, which marked an increase on a monthly basis for the first

time since the beginning of the year (by 0.4%). The latter indicates that the effect of

the income interest tax, which was introduces in January and led to the

transformation of term deposits into sight deposits and other savings instruments, is

probably exhausted. Overnight deposits also rose during the month - by 0.6%, but

their rate of increase lost momentum compared to the previous few months.

As to the annual-based changes, the money supply growth rate accelerated to

8.1% in September. Nevertheless, it remained close to the observed dynamics in

the preceding three years and corresponded to a relatively weak economic

activity. By components, the yearly-based trends remained without a significant

change. The largest contributor to the annual growth of M3 were deposits

redeemable at notice up to 3 months (6.6 p.p.) as it expanded by 69.5% yoy.

Overnight deposits also had a significant positive effect to money supply dynamics

by 5.2 p.p., resulting from an increase by 21.6%. At the same time , the amount of

deposits with agreed maturity up to two years declined by 8.9% compared to

September 2012 and had a negative contribution by 4.7 p.p. to the change in

M3.

As of the end of September, the assets of the Issue Department of the Bulgarian

National Bank amounted to EUR 14.9 bn. They stepped up on a monthly basis by

EUR 62.1 mn, offsetting the decline by almost the same amount in August.

By components, the observed increase of BNB’s reserves was mainly on the

account of the government deposit, which rose by EUR 122.5 mn. The latter

stemmed from a pickup in the fiscal reserve, primarily due to an internal issue of

government bonds for about EUR 150 mn, which was placed in September. Bank

deposits at BNB continued their upward trend (rising by EUR 73.5 mn compared to

August), which is associated with the deposits growth and the presence of high

liquidity in the banking system. Meanwhile, notes and coins in circulation and

liabilities of BNB to other depositors diminished respectively by EUR 32.5 mn and

EUR 26.8 min, while an even larger decline was realized by the deposit of BNB’s

Banking Department - by EUR 74.7 mn.

On a yearly basis BNB’s FX reserves diminished by EUR 569.3 mn. This change

was driven by a decline in the government deposit by EUR 1.1 bn (mainly due to

repayment of a Eurobond emission in January 2013) and in the deposit of the

Bank Department of BNB by EUR 562.5 mn. A part of this drop was offset by rise

in notes and coins in circulation (by EUR 358.4 mn) and bank deposits at the BNB

(by EUR 621.9 mn).

At the end of September 2013 the coverage of the monetary base with

international reserves remained almost unchanged on a monthly basis at 165.1%.

Excluding the government deposit from the calculations, the coverage of the

monetary base with international reserves fell to 138.8% compared to 140.1% at

the end of August. Both ratios remained significantly above the necessary 100%

for the stability of the currency board.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII

2007 2008 2009 2010 2011 2012 2013

Money outside banks Overnight deposits

Deposits w/ maturity up to 2 years Deposits red. at notice up to 3 months

Broad money M3

30%

40%

50%

60%

150%

170%

190%

210%


2009 2010 2011 2012 2013

FX reserves/ Monetary base FX reserves/ M3 (rhs)

9

Monetary sector

Figure 21: Net foreign assets of banks

(BGN bn)


Figure 22: Loans (% yoy)


Figure 23: Average annual interest rates on

new loans (%)

Source: BNB, NSI, Raiffeisen RESEARCH

Figure 24: Deposits (% yoy)


In September bank net foreign assets remained in a positive territory, which they

entered in August for the first time since 2007. Their value even increased in

September - by BGN 58.3 mn to BGN 239.3 mn. This dynamics entirely stemmed

from a decline in foreign liabilities (by BGN 123.4 mn), mainly due to a

withdrawal of deposits by non-residents of the country (by BGN 124.4 mn). A

similar pattern was observed with regard to the deposits of Bulgarian banks

abroad – a withdrawal by BGN 137.3 mn. Meanwhile, bank foreign assets on the

account of repurchase agreements increased by BGN 101.9 mn, while their cash

in foreign currency fell by BGN 27.9 mn. The cumulative improvement in bank net

foreign assets from September 2012 reached a significant size: almost BGN 2.9

bn. The latter was primarily on the back of increased investments in securities

abroad (BGN 1.1 bn) and a decline in foreign deposits in the country (BGN 1.5

bn). Also, as of September, an annual growth of nearly BGN 2.0 bn was

registered both on the account of foreign assets (loans) and foreign liabilities

(repos) because of a one-off deal of one bank in November 2012. However, the

latter had no effect on the overall dynamics of net assets.

In September lending activity marked an improvement. The total amount of loans

increased by BGN 241.2 mn (0.5%) on a monthly basis and offset the August

decline by BGN 202.2 mn (0.4%). However, the annual growth rate remained low

(0.7%), significantly slowing down compared to the previous few years and even

compared to the period of the recession.

Almost all of the increase of lending activity during the month was due to a pickup

in loans to non-financial corporations: by BGN 237.3 mn. Nevertheless, corporate

loans’ growth rate decelerated markedly compared to the last two years and

amounted to 1.4% yoy as of the end of September.

As to household loans, only a marginal increase of BGN 3.9 mn was recorded in

September. As a result, the annual lending growth in this segment remained

negative, but slowed down to 0.6% yoy.

Considering the interest rates as determinants to demand for loans, the average

annualized interest rate on new corporate loans posted a decline from early-2013

– it fell from almost 9.0% in January-April to 7.7% in September. Interest on new

mortgages remained almost unchanged from the beginning of the year. With

regard to new consumer loans, the average interest rate rose to 11.6 % from the

minimum rate for the last four years at 10.4% in April 2013. Meanwhile, annual

inflation remained negative and kept stepping down. It amounted to -1.6% in

September, compared to -0.7% in August. Therefore, as of September the real

interest rates continued to rise, reaching record high levels, which were observed

only during the recession in 2009. This process imposes a restraining influence on

the demand for loans.

Bad and restructured loans decreased by BGN 12.8 mn in September, after a

decline by BGN 49.8 mn in August. Nevertheless, their share in total loans

(excluding overdraft) remained unchanged: 22.9%. Cumulatively from the

beginning of 2013, bad and restructured loans stepped up by BGN 107.5 mn.

Similarly to the previous three months, deposits marked an increase by an

accelerated rate of BGN 711.0 mn (1.5%) on a monthly basis. As a consequence,

the annual deposit growth reached 7.4%.

The main part of the increase in deposits in September was due to the corporate

sector (by BGN 553.5 mn, which is a relatively big monthly increase on the

backdrop of the previous four years). The latter is probably due to higher revenues

from export combined with precautionary saving behaviour of the firms.

Household deposits also picked up during the month: by BGN 157.5 mn (0.5 %).

The annual rate of growth slowed slightly and amounted to 8.1%.

-14

-12

-10

-8

-6

-4

-2

0

2

4

I V IX I V IX I V IX I V IX I V IX I V IX I V IX

2007 2008 2009 2010 2011 2012 2013

-5%

0%

5%

10%

15%

20%

25%

30%

35%


2009 2010 2011 2012 2013

Non-financial enterprises Households

-4

-2

0

2

4

6

8

10

12

14

16

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7

2007 2008 2009 2010 2011 2012 2013

Corporate loans Consumer loans

Mortgages Annual inflation

-15%

-10%

-5%

0%

5%

10%

15%

20%


2009 2010 2011 2012 2013

Non-financial enterprises Households

10

External sector

Figure 25: Current account (EUR mn)


Figure 26: Trade balance (EUR mn)


Figure 27: Foreigners travelling to Bulgaria

for tourism June-August 2013 by country

(%)


Figure 28: Revenues from foreigners

travelling to Bulgaria June-August (EUR mn)


Record high trade balance

and large financial outflow in August

Тhe current account posted a record high surplus of EUR 884.4 mn in August. A

positive balance is typical for this particular month, mainly because of revenues

from tourism and export of agricultural production, but not of such significant

volumes. Cumulatively from the beginning of the year the balance of the current

account reached EUR 1.3 bn (3.1% from the forecast GDP for the year) and

exceeded the observed data during the same period in the previous years, for

which data is available. From one side, the improved current account is a result of

a favourable growth of export and inflowing transfers (mainly from EU funds). From

the other side, this is connected to the realized outflow on the financial account,

which, in addition to the current uncertainty in the country, limits the economic

activity and leads to a decline in import.

Typically for August, net services brought the most considerable contribution to the

positive balance of the current account. Their value was EUR 587.0 mn during the

month, similarly to the amount in July (EUR 575.9 mn). Export of services

contracted on an annual basis by EUR 10.7 mn, which was fully compensated by

a decline in the import of services by EUR 34.8 mn. As a result, net services

improved slightly over the previous year. The revenues from foreigners travelling to

Bulgaria during the period were high (amounting to EUR 634.3 mn), which was а

characteristic feature of the active tourist season. Although the value remained

high, no significant improvement compared to the previous years was marked –

there was only a slight increase of 2.4% vs. August 2012. The most notable

contribution to the rise in the number of travels of tourists to Bulgaria was made by

Russians, while the flow of EU tourists remained almost unchanged compared to

the previous year.

The trade balance brought the most significant contribution to the improvement of

the current account during the month. In contrast to its usual negative value, net

merchandise trade registered a surplus of EUR 125.14 mn in August. For the last ten

years surplus of trade account was only registered in August 2011, but in a

smaller value. Compared to a year earlier, the trade balance improved tangibly:

by EUR 255.5 mn. Cumulatively from the beginning of 2013 it remained negative

(EUR -1.3 bn), but stepped up considerably compared to the same period of the

previous year - by EUR 1.1 bn. The improvement in August resulted from a

favourable trend of merchandise export (growth by 6.9% yoy), and also from with

a decline in import (by 6.4%). Perhaps, similarly to the previous two months, raw

materials used in food production had the most significant contribution to the

observed export expansion. Agricultural goods have a large share in the structure

of the export during the summer months and the data for the current year’s harvest

is relatively favourable. On the back of envisaged recovery of the European

economy and an increase in the demand for Bulgarian goods, the favourable

export dynamics is expected to continue until the end of the year. On the other

hand, the decline in import was probably mainly on the account of investment

goods, in line with the contracting capital formation during the year. On average

for January- August export expanded by 7.9% on an annual basis, but import

declined by 0.4% yoy.

The income account remained negative in August, but marked a considerable

improvement compared to a year ago – it grew by EUR 134.6 mn and totalled to

EUR -55.5 mn. The deficit contraction stemmed from a reduced investment income

outflow, which is related to the smaller FDI in the country.

Current transfers were developing favourably and their importance, as a foreign

source of financing to the economic and investment activity in the country,

4 It should be taken into account that the data is preliminary and subject to revisions

-800

-600

-400

-200

0

200

400

600

800

1000

I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII

2010 2011 2012 2013

Trade balance Services, net

Income, net Current transfers, net

Current account

-1000

-800

-600

-400

-200

0

200

I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII I VII

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Germany14%

Greece8%

United Kingdom4%

Poland5%

Romania9%

Other EU countries

19%

Russia15%

Ukraine7%

Other countries19%

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013

June July August

11

External sector

Figure 29: Financial account (EUR mn)


Figure 30: Net financial inflows by sectors,

cumulatively for January-August (EUR mn)


intensified. In August their net value totalled to EUR 227.9 mn, posting an

improvement by EUR 103.5 mn compared to a year ago. Cumulatively for

January–August net transfers amounted to EUR 1.8 bn, growing dynamically on a

yearly basis (by 23.8%). Moreover, their annualized value for the last 12 months

reached EUR 2.4bn, thus exceeding the amount of net services, which used to be

the most significant contributor to the current account.

In August the capital account totalled to EUR 63.3 mn, mainly due to transfers from

the EU funds to the general government sector. Nevertheless, cumulatively from the

beginning of 2013 the balance of the capital account decreased by 11.8% on an

annual basis.

As a reflection to the current account, the financial account marked an untypically

high flow in August, but outgoing from the country (EUR -567.9 mn). The main part

of the outflow was on the back of investment other than direct and portfolio, whose

balance totalled to EUR -491.3 mn. In particular, it was due to an outflow of

currency and deposits, both on the account of banks’ foreign assets and foreign

currency and deposits in the country. Meanwhile, the size of FDI during the month

was negative (EUR -42.3 mn), which is manly related to repayment of liabilities to

foreign investors (by EUR 34.2 mn). Portfolio investments also had a negative

balance during the month: EUR - 34.4 mn.

Cumulatively from the beginning of the year the balance of the financial account

was also negative, totalling to EUR -1.7 bn. It marked a significant decrease

compared to the same period the previous year, when the balance was positive at

the amount of EUR 1.8 bn. One part of the change was due to the public sector: in

July 2012 a Eurobond emission of about EUR 1.0 bn was placed on the external

market (resulting in a financial inflow of EUR 701.25 mn), while in January 2013 a

maturing emission of similar value was repaid (leading to an outflow of EUR 300.4

mn).Nevertheless, the main part of the decrease of the financial account compared

to January – September 2012, of around EUR 2.6 bn, was on the account the

private sector, mostly because of an outflow of currency and deposits, as well as

due to a decline in FDI inflow to the country.

As a result of the presented developments, in August the balance of the current

account, capital and financial account totalled to EUR 379.9 mn. After adjusting

for errors and omissions6 of a significant amount, the balance of payments

amounted to EUR -129.2 mn and, respectively, BNB’s FX reserves stepped down

by the same value.

5 The rest of the emission was purchased by residents on the secondary market during the month.

6 Respectively, downward revisions of the components of the Balance of payments can be expected with

the following data releases

-1500

-1000

-500

0

500

1000

1500

I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII

2010 2011 2012 2013

Direct investment, net Portfolio investment, net

Other investment, net Financial account

-1500

-1000

-500

0

500

1000

1500

2012 2013

Privare sector General government

12

Key figures

Source: NSI, BNB, MoF, Raiffeisen RESEARCH

2009 2010 2011 2012 2013e 2014f

Real GDP (% yoy) -5,5 0,4 1,8 0,8 0,5 2,0

Nominal GDP (EUR bn) 34,9 36,1 38,5 39,7 40,5 42,0

Nominal GDP per capita (EUR) 4618 4804 5255 5447 5594 5849

Nominal GDP per capita (EUR at PPP) 10368 10762 11628 12074 12165 12440

Individual consumption (real, % yoy) -7,6 0,6 1,7 2,0 0,5 1,4

Government consumption (real, % yoy) -4,9 -0,5 0,3 -0,4 1,7 -0,8

Gross fixed capital formation (real, % yoy) -17,6 -18,3 -6,5 0,8 0,9 0,7

Exports of goods and services (real, % yoy) -11,2 14,7 12,3 -0,4 4,9 5,8

Imports of goods and services (real, % yoy) -21,0 2,4 8,8 3,7 2,2 5,2

Industrial output (% yoy) -18,3 2,0 5,8 -0,4 -2,0 4,0

Producer prices (avg, % yoy) -6,2 8,5 9,5 4,4 0,2 5,5

Consumer prices (avg, % yoy) 2,8 2,4 4,2 3,0 2,0 3,4

Consumer prices (eop, % yoy) 0,6 4,5 2,8 4,2 1,5 3,2

Average monthly gross wages (BGN) 609 648 686 758 795 826

Average gross wages ( % yoy) 11,8 6,4 5,8 10,5 2,3 3,9

Average monthly gross wages (EUR) 311 331 351 388 406 422

Average gross industrial wages ( % yoy) 9,7 10,5 6,6 9,7 4,9 5,1

Employed persons (LFS, thd, avg) 3254 3053 2965 2934 2919 2948

Employment (avg, % yoy) -3,2 -6,2 -2,9 -1,1 -0,5 1,0

Unemployment rate (avg, %) 6,8 10,2 11,2 12,3 12,5 12,0

General budget balance (% of GDP) -0,9 -4,0 -2,0 -0,5 -2,1 -1,8

Public debt (% of GDP) 14,6 16,2 16,3 18,5 17,8 19,4

Export of goods (EUR mn) 11699 15561 20264 20770 21905 22997

Import of goods (EUR mn) 15873 18325 22420 24230 24682 25862

Trade balance (EUR mn) -4174 -2764 -2156 -3460 -2777 -2866

Current account balance (EUR mn) -3116 -533 33 -521 385 197

Current account balance (% of GDP) -8,9 -1,5 0,1 -1,3 1,0 0,5

Net foreign direct investment (EUR mn) 2505 977 1213 1209 1417 1634

Net foreign direct investment (% of GDP) 7,2 2,7 3,1 3,0 3,5 3,9

Official FX reserves (EUR bn) 12,9 13,0 13,3 15,6 15,4 18,2

Official FX reserves (% of GDP) 37,0 36,1 34,7 39,2 38,1 43,3

Gross foreign debt (EUR bn) 37,8 37,0 36,3 37,6 37,0 37,5

Gross foreign debt (% of GDP) 108,3 102,7 94,3 94,9 91,4 89,2

EUR/BGN (eop) 1,96 1,96 1,96 1,96 1,96 1,96

EUR/BGN (avg) 1,96 1,96 1,96 1,96 1,96 1,96

USD/BGN (eop) 1,37 1,46 1,51 1,48 1,50 1,50

USD/BGN (avg) 1,40 1,47 1,41 1,52 1,49 1,50

EUR/USD (eop) 1,43 1,34 1,30 1,32 1,30 1,30

EUR/USD (avg) 1,39 1,33 1,39 1,29 1,31 1,30

Key interest rate (% avg) 2,0 0,2 0,2 0,1 0,2 0,2

3 month Sofibid (% avg) 4,1 2,3 2,0 1,0 0,5 1,1

10 year T-bond yield (% avg) 7,2 6,0 5,4 3,4 3,5 4,4

Ratings, long-term, foreign currency Current Outlook

S&P BBB stable

Moody's Baa2 stable

Fitch BBB- stable

Rating confirmed in December 2012

Rating upgraded in July 2011

Rating confirmed in July 2013

Comment

13

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10% 0,4% 0,8% 0,5% - rbb.bg · rate was stronger compared to thеse, registered in the last two years. Meanwhile, on average for the last 12 months as of September, the same indicator