Highlights. May The currency board is stable with high coverage of the monetary aggregates with FX reserves.

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1 May 217 Real GDP and inflation e Real GDP (% yoy) Consumer prices (avg., % yoy) Public debt and budget balance Highlights In Q1 217, the real GDP grew by 3.4% (yoy), driven by final consumption, while contributions of investments and net export were negative. The currency board is stable with high coverage of the monetary aggregates with FX reserves. Employment increased and unemployment declined in the period January- March, reflecting the positive dynamics of the GDP. The monthly inflation was positive in April, after having been negative in March. Significant budget surplus was accumulated in the first three months of the year against the background of stable government debt. The current account registered a surplus in Q1 217, however it was shorter compared to Q1 of the previous year. The volume of new loans and deposits increased. The share of non-performing loans, excluding overdrafts, stepped back from the level in March 216. Analyst: Emil Kalchev, PhD emil.kalchev@raiffeisen.bg Editor: e Public debt (% of GDP) Bojidar Gyurov bojidar.gyurov@raiffeisen.bg General budget balance (% of GDP, r. h. s.) -4. In May 217, the European Commission issued its annual report in which it outlined the four main reforms that Bulgaria has to implement throughout the year: 1. Increase its tax collection rate and the tackling of the grey economy. Even though the Commission acknowledges that there are some improvements, tax collection remains, however, a key issue for Bulgaria. 2. To impose additional supervision of banks, pension funds and insurance companies. The stress tests, conducted during 216, confirmed the overall stability of the financial sector, however they also revealed key weaknesses within some institutions. 3. Improve labor market reform programs aimed at reducing income inequality. Currently, there are high levels of long-term unemployment and an insufficiency of qualified workers. 4. To effectively implement the new national strategy regarding public procurements. 1

2 Fiscal and external sector Industry by sectors (% yoy) GDP again grew by more than 3 per cent According to the flash estimates data of the National Statistical Institute, in Q1 217, Bulgaria s GDP grew by 3.4% yoy in real terms. Final consumption, the most significant component of the GDP on the demand side (87.6% of GDP), soared by 4.1% yoy. The second largest component the gross fixed capital formation (17.5% of GDP), narrowed by 5.4%. The third component, the net export, was negative (-5.1% of GDP), as exports increased by 7.2% yoy, while imports went up by 1.6% yoy. Construction by components (% yoy) As for the supply in the economy, the industry output stepped up by 3.8% yoy during Q1. By components, manufacturing registered a solid increase in production of 4.9% yoy, the mining industry grew by 3.8% yoy, while the production of electricity, heat and gas languished by.8% yoy. Similar to the industry, construction also rose during the period, albeit at a very low pace of.3% yoy, after having declined during the four quarters of the previous year. Its weak growth in Q1 217 was a result of an expected increase in the buildings Employment and unemployment rates (%) 52 Civil engineering Building construction Consrtuction - total 16 construction segment by 6.% yoy, which, however, was accompanied by a decline in the civil and engineering construction by 5.9% decline coincided with the turbulent political situation in the country around the presidential elections in Q4 216 and the general elections in Q The faster growth in the region is expected to further give a positive impulse on the exports in the coming quarters. On the other hand, consumption is forecast to Employment rate Unemployment rate Average annual inflation (%) continue increasing, while the reduction of gross fixed capital formation will most likely gradually slow down due to the achieved political stability and, in particular, because of an expected improvement in the absorption of EU funds. Overall, the absorption of EU funds is forecast to be moderate in 217. Against this backdrop, interest rates on loans will keep their low levels and public spending for investments will increase moderately. Reflecting the positive dynamics of the GDP in Q1, the employment rate rose by 2 1.5pp yoy to a level at 5.%. Otherwise, the unemployment rate decreased by 1.7pp to 6.9%. Both indicators are anticipated to further improve in the coming quarters of I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I IV The monthly inflation was positive at.7% for April, impacting the transition of the average annual inflation to the positive territory reaching.2%. The average annual inflation was positive last for the time in January

3 Fiscal and external sector Budget surplus amid a stabile public debt General budget balance (BGN bn) I II III Monthly Balance, 216 Monthly Balance, 217 Cumulative Balance, 216 Cumulative Balance, 217 Source: MF, RBI/Raiffeisen RESEARCH Public debt (BGN bn) As of March 217, the state budget accumulated a surplus of BGN 1.1 bn, which, however, was shorter than the surplus of BGN 1.9 bn in March 216. Compared to the GDP for Q1 217 (BGN 19.6 bn) the state budget registered a surplus of 5.4%. Total revenues and grants collected by the state in the first three months of the year amounted to BGN 8.8 bn (2.9% yoy decline), while total spending (including contributions to the EU budget) stood at BGN 7.8 bn (7.5% yoy increase). The decline in revenues was due to a 7.6pp contribution of tax revenues, but also a -1.2pp contribution of grants and a -.3pp of non-tax revenues. The tax revenues growth was mainly a result of the GDP increase. Social expenditures (2.4pp), subsidies (2.4pp) and public debt interests (1.2pp) were the core factors that contributed to the increase in spending. Overall, the data shows a healthy picture of the state budget, despite the increase in spending and the decrease in revenues in year on year terms. -6 I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I Fiscal reserve External debt Budget balance The fiscal reserve fund decreased to BGN 12.6 bn or by BGN 1. bn compared to February, while the overall government debt was maintained at BGN 26.3 bn. Source: MF, RBI/Raiffeisen RESEARCH Current account (EUR mn) Trade balance Services, net Primary income, net Secondary income, net Current account FDI in the country (EUR mn) 5 Positive current account The accumulated current account balance turned positive at EUR 59.9 mn in Q1 (.1% of GDP), while the surplus in Q1 216 stood at EUR mn (.5% of GDP). Within the current account, export of goods grew by 17.7% yoy, while the import of goods soared by 22.% yoy. These dynamics led to widening of the trade deficit to EUR mn (-1.3% of GDP), which was EUR mn greater than the balance in Q As expected, the balance of services was positive in Q1 217 at EUR mn (.5% of GDP) deteriorating significantly by EUR mn yoy. The accumulated balance of secondary income once again strongly supported the current account by EUR mn (1.% of GDP), while primary income turned positive in the first quarter of 217, even though the cumulative balance stood insignificantly at EUR 9.6 mn (.2% of GDP). 1-3 During the period January-March 217 the foreign direct investments stood negative at EUR mn, decreasing by EUR mn on an annual basis. The largest foreign direct investment for the first quarter came from Norway (EUR 17.7 mn). 3

4 Monetary and banking sector Monetary base and M3 coverage (%) The FX currency board is stable In March, a growth of the FX reserves by BGN 38.8 mn mom was observed. On the other hand, the coverage of the monetary base with FX reserves was slightly reduced by 2.pp to 163.% due to an increase in monetary base by BGN mn. The widened base was a cumulative result of a monthly leap in the liabilities to banks by BGN 67.5 mn and an insignificant decrease in the money in circulation Loans development (% yoy) 1 by BGN 21.7 mn. The coverage of the broad money (M3) went up slightly by.3pp to 58.9%, on the back of the rise in the FX reserves and a weaker increase of the aggregate M3 by BGN 23.5 mn. Both indicators accounted for the stability of the currency board. Sustainable growth in lending -1 According to the monetary statistics of the Bulgarian National Bank, in March -2 I V IX I V IX I V IX I V IX I V IX I 217, lending to businesses and individuals grew by 3.3% yoy, for the sixth consecutive month, reaching a total volume of BGN 49.5 bn. The increase in loans Households Non-financial enterprises to businesses was 2.5% yoy to BGN 3.8 bn, whereas loans to households stepped up by 4.7% yoy to BGN 18.8 bn. Deposits development (% yoy) 2 1 The level of non-performing and restructured loans (NPLs), excluding overdrafts, decreased by 3.pp yoy to 19.8% in March. The share of NPLs to businesses was far more significant: 24.2% (3.pp below the level of March 216). On the other hand, as of March 217, the share of the non-performing and restructured loans to households dropped by 2.8pp yoy to a level of 14.4%. -1 I V IX I V IX I V IX I V IX I V IX I As expected, the volume of deposits rose again by 7.2% yoy and they reached BGN 61.8 bn in March, which was by BGN 12.3 bn above the loans volume. By Non-financial enterprises Households Average interest rates (% p.a.) I IV VII X I IV VII X I IV VII X I IV VII X I IV VII X I Inflation Deposits Loans components, household deposits grew by 6.5% yoy, reaching BGN 43.2 bn, while those of non-financial enterprises went up by 8.9% yoy to BGN 18.6 bn. In March, the dynamics of loans and deposits occurred against the background of creeping inflation and stabilized average nominal interest rate. Thus, the average nominal interest rate on loans stood at 5.4% p.a. (1.pp mom decrease), while the interest rate on deposits kept its February levels at.4% p.a. Hence, the interest rate margin was reduced by.2% mom to 5.pp. Following the slow rise in the inflation, the period from January to March was marked by increasing negative interest rates on deposits, for the first time since January

5 Key figures e 218f 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) 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 Comment S&P BB+ positive Moody's Baa2 stable Fitch BBB- positive Source: NSI, BNB, MF, RBI/Raiffeisen RESEARCH Rating confirmed in June 217 Rating confirmed in May 217 Rating confirmed in June 217 5

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