Highlights. November According to flash estimates data of the National Statistical Institute, in Q3 2016, GDP reached 3.5% yoy in real terms.

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1 November 16 Highlights Real GDP and inflation According to flash estimates data of the National Statistical Institute, in Q3 16, GDP reached 3.% yoy in real terms The employment rate dereased by.pp yoy in Q3 reaching 9.9%. In turn, the unemployment rate decreased by 1.3pp to 7.% for the period. In October 16, the consumer price index indicated monthly inflation of -1..%. The current account balance was again positive in the third quarter of the year e 17f Real GDP (% yoy) Consumer prices (avg., % yoy) Public debt and budget balance The Netherlands was the leading foreign investor in Bulgaria for the period January September 16, followed by Germany and UK. Lending continued its year-on-year decline in September 16, while deposits continued rising. Nevertheless, in September a growth in lending was. observed compared to August e 17f Analyst: Emil Kalchev, PhD emil.kalchev@raiffeisen.bg Editor: Public debt (% of GDP) Bojidar Gyurov bojidar.gyurov@raiffeisen.bg General budget balance (% of GDP, r. h. s.) Presidential elections were held in November. In the first round narrowly won the candidate supported by the Bulgarian Socialist Party (BSP), followed by the candidate of the ruling party GERB. Both competed at the run-off and the BSP candidate Gen. Radev won a landslide victory. After the vote the Prime Minister Borisov resigned the government, which means that early parliamentary elections are on the horizon. However, it is not clear yet in what system the early elections will be held as at the referendum held with the first elections round voters were in favor of new majority system. Despite the referendum results could not reach to become directly a law and should go into the Parliament for voting, a change is unavoidable. Although the results of the current elections cannot be transmitted verbatim to future parliamentary elections, they clearly indicated for: negative vote to the GERB candidate, greater support for protesters and patriotic political formations, weak support for the right candidate of the Reformist Bloc, clear expectations for a change on the voters part. Most likely, GERB will remain the party with the most seats in the future Parliament, which, however, will need again coalition partners to govern. According to the presidential vote, potential partners would be the patriots and other new protesters parties. 1

2 Fiscal and external sector Industry by sectors (% yoy) 1-1 High GDP growth in Q3 According to flash estimates data of the National Statistical Institute, in the third quarter of 16, GDP reached 3.% yoy in real terms. - І ІІ ІІІ ІV І ІІ ІІІ ІV І ІІ ІІІ ІV I II III IV I II III IV I II III Mining Manufacturing Electricity, gas and air condit. supply Industry - total Construction by components (% yoy) The most significant component of the GDP on the demand side - final consumption (69.7% of GDP) increased by 1.% yoy. The smaller component of the GDP, gross fixed capital formation (18.3% of GDP) dropped by.%. The third component, the net export was positive (1.% of GDP), as in its framework export went up by 8.% yoy, while import growth was almost in half by 3.9% in the period. -1 Employment and unemployment rate I II III IV I II III IV I II III IV I II III IV I II III IV I II III Civil engineering Building construction Consrtuction - total On the production side, in Q3, the output of industry went up by.6% yoy. By components, production of manufacturing stepped up by 3.8% yoy, while electricity, heat and gas and mining industry registered a decline by.7% and.% yoy, respectively. Unlike the industry, construction shrank by 11.3% yoy, for the third consecutive quarter. Its decline was a result of a solid decrease in both engineering and buildings construction by 1.% and 8.7% yoy, respectively. The employment rate declined slightly by.pp yoy in Q3 reaching 9.9%. Otherwise, the unemployment rate decreased by 1.3pp to 7.%. Both indicators are reflecting the positive dynamics of the GDP in Q3 and are anticipated to gradually improve. 6 I IІ III IV I II III IV I II III IV I II III IV I II III IV I II III Employment rate (%, l.h.s.) Unemployment rate (%, r.h.s.) Average annual inflation (%) 6 The average wage grew by BGN 67, from BGN 87 in Q3 1 to BGN 91 in Q3 16, on the back of the economic growth in the period. The increase in the public sector was BGN 6, while in the private sector it was BGN 69. However, the average wage in the public sector (BGN 973) remained higher than the one in the private sector (BGN 931). The monthly inflation for October turned into positive territory and reached.% although it had no impact on the annual average inflation, which remained - negative at.8%. The end-of-period inflation was at the level of -.% in October. Strongest negative contribution was given by decreasing prices of telecommunication, culture and entertainment, clothing, footwear and transport.

3 Fiscal and external sector Consecutive gross state budget surplus in September General budget balance (BGN bn) Source: MF, RBI/Raiffeisen RESEARCH Budget balance, public debt and fiscal reserve (EUR bn) 1 - I II III IV V VI VII VIII IX Monthly Balance, 1 Monthly Balance, 16 Cumulative Balance, 1 Cumulative Balance, 16 Fiscal reserve Total public debt Budget balance Source: MF, RBI/Raiffeisen RESEARCH Current account by components (EUR mn) I II III IV I II III IV I II III IV I II III IV I II III IV I II III Trade balance Primary income, net Current account FDI in the country (EUR mn) 9 Services, net Secondary income, net As of September 16, the gross state budget balance remained significant positive (BGN 3. bn), for the ninth consecutive month since the beginning of the year. This was influenced by intensive growth of total revenues by 6.% yoy and decline of total spending by.% compared to September 1. The growth in total revenues was due mainly to rising tax revenues, which contributed by 6.pp and weak contribution of non-tax revenues (1.6pp) against the background of worsened absorption of EU funds (by -1.7pp). The largest contributor for the decline in total expenditure was capital spending (-8.pp), while all other spendings acted weaker into the positive direction as they grew. The fiscal reserve fund (on deposits) decreased by BGN 11.9 mn in September (compared to August), while the other component - receivables from the EU, contracted by BGN 97. mn. In total, the fiscal reserve fund diminished by BGN 1. mn, remaining at a high level of BGN 1.3 bn. In accordance with this change, in September, public debt declined by BGN. mn as external debt diminished by BGN. mn, whereas internal public debt decreased by BGN 17. mn. Hence, total public debt amounted to BGN.9 bn as of September 16, which is by BGN 3. bn more than the level in September 1. Current account remained positive Accumulated current account balance remained positive in Q3 (EUR 1. bn), similar to the same period in the previous year when its balance was EUR 1. bn. By components, trade balance deficit narrowed to EUR -7.3 mn or by EUR 1.9 mn less compared to the deficit in Q3 1. As expected, the balance of services was positive in Q3, at the record level of EUR 1.8 bn, growing significantly by EUR 188. mn yoy. The secondary income again bolstered the current account by EUR 199. mn (annual decrease of EUR 11. mn), while primary income continued being negative with a cumulative balance for the quarter of EUR mn, which, however, was by EUR 11. mn less than the balance in the period July-September I II III IV I II III IV I II III IV I II III IV I II III IV I II III Foreign direct investments (FDIs) in the country for Q3 16 totaled EUR 38. mn, which was by EUR 6. mn higher than the volume in Q3 1. For the first nine months of 16 the FDIs in the country amounted to EUR 1.3 bn, which was slightly more than in the same period of 1 when they were EUR 1.1 bn. Within the geographical structure of the FDIs, leading investors in the country was the Netherlands (EUR 33. mn), followed by Germany (EUR mn) and the United Kingdom (EUR 19.1 mn). 3

4 Monetary and banking sector Loans development (% yoy) 1 Positive signals on lending -1 - Households Non-financial enterprises Average interest rate on loans (% p.a.) 1 1 According to the monetary statistics published by the Bulgarian National Bank net foreign assets of banks significantly grew in September 16 by BGN 3. mn, reaching BGN 6.3 bn. This rise was due to intensive increase in foreign bank assets by BGN 1.9 bn and narrowing in foreign bank liabilities by BGN 1.3 bn yoy. A positive fact was the growth in total lending by.3% in September compared to August, which in respect to the loans to businesses was.1% mom and to those to households was.% mom. Against this background, in September, for the twenty third consecutive month, lending to businesses and individuals contracted by total.7% yoy, reaching BGN 8.9 bn. Lending to non-financial enterprises registered a more significant drop by 1.% yoy to BGN 3. bn, whereas lending to households registered a moderate growth by.% yoy to BGN 18. bn. - I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII Corporate loans Consumer loans Mortgages Annual inflation Deposits development (% yoy) In contrast to the same period of 1, lending in September 16 was accomplished in lower average nominal interest rates environment. 1 Thus, the average nominal interest rate on loans to non-financial enterprises was.6%, or by 1.pp less than the one a year before. The interest rate on consumer loans decreased by.pp mom to 1.1%, while the one on mortgage loans reached.8% stepping down by 1.pp. 1-1 Non-financial enterprises Households The level of non-performing and restructured loans (excluding overdrafts) increased slightly by.1pp mom to 1.% in September 16, which, however, was higher by.3pp compared to the level in September 1 (3.6%). The share of nonperforming and restructured loans to businesses decreased by.pp yoy, reaching the significant.3%, while when it comes to households and individuals its share stepped down by.pp yoy to 16.%. Average interest rate on deposits (% p.a.) 8 The volume of deposits increased again on an annual basis by 7.% to BGN 9.7 bn in September. By components, households deposits rose by 6.1% yoy, reaching BGN 1. bn, while those of non-financial enterprises stepped up by 9.6% yoy up to BGN 18. bn. - I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV VII Non-financial enterprises Households Annual inflation In September, the average nominal interest rate on households deposits stayed at its level of.7%, which was twofold lower than a year before. The rate on deposits of non-financial enterprises was also.7% in September, or.1pp less compared to September Average weighted value of nominal interest rates on loans (deposits) in BGN, EUR and USD.

5 Key figures e 17f Real GDP (% yoy) Nominal GDP (EUR bn) Nominal GDP per capita (EUR) Nominal GDP per capita (EUR at PPP) Individual consumption (real, % yoy) Government consumption (real, % yoy) Gross fixed capital formation (real, % yoy) Exports of goods and services (real, % yoy) Imports of goods and services (real, % yoy) Industrial output (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Consumer prices (eop, % yoy) Average monthly gross wages (BGN) Average gross wages ( % yoy) Average monthly gross wages (EUR) Average gross industrial wages ( % yoy) Employed persons (LFS, thd, avg) , 383. Employment (avg, %yoy ) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Export of goods (EUR bn) Import of goods (EUR bn) Trade balance (EUR bn) Current account balance (EUR bn) Current account balance (% of GDP) Net foreign direct investment (EUR bn) Net foreign direct investment (% of GDP) Official FX reserves (EUR bn) Official FX reserves (% of GDP) Gross foreign debt (EUR bn) Gross foreign debt (% of GDP) EUR/BGN (eop) Ratings, long-term, foreign currency Current Outlook S&P BB+ stable Moody's Baa stable Fitch BBB- stable Comment Rating confirmed in June 16 Rating confirmed in June 16 Rating confirmed in July 16 Source: NSI, BNB, MF, RBI/Raiffeisen RESEARCH

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