Bulgaria in the EU: Challenges and opportunities 60 days before EU: what to expect, what to do? Sofia, October 18, 2006 Maria Laura Lanzeni Head of Emerging Markets Global Risk Analysis Think tank of Deutsche Bank Group
Overview 1 Thumbs up for growth and investment 2 Some challenges ahead 3 Euro: All clear? Maria Lanzeni October 18, 2006 page 2
Overview 1 Thumbs up for growth and investment 2 Some challenges ahead 3 Euro: All clear? Maria Lanzeni October 18, 2006 page 3
Outstanding economic growth Bulgarian growth has outperformed GDP growth, % yoy 6 5 4 3 2 Eastern European countries have grown much faster than Euroland, driving catchup process forward Bulgaria, in turn, has outperformed the CEE-4 countries Bulgaria s GDP per capita has doubled in only 4 years Current high economic growth likely to be sustainable in the medium run 1 Bulgaria CEE-4* Euroland 2001 2002 2003 2004 2005 2006 2007 *Czech Republic, Hungary, Poland, Slovakia 0 Maria Lanzeni October 18, 2006 page 4
Growth has been driven by investment % yoy 2001 2002 2003 2004 2005 2006 (H1) 25 20 15 10 5 0 Investment has been by far the most dynamic component of growth, mirroring the ongoing modernisation of the Bulgarian economy Investment ratio increased from roughly 15% of GDP in 2000 to 25% currently - and capital formation process likely not exhausted yet Private consumption benefits from substantial increases in real wages Import growth surpassing export growth since 2003 Private consumption Exports Gross fixed investment Imports Source: National Statistical Institute (Bulgaria) Maria Lanzeni October 18, 2006 page 5
Bulgaria: FDI magnet FDI, % of GDP, 2005 Czech Rep. Bulgaria Romania Hungary Serbia/Montenegro Croatia Poland Russia 0 2 4 6 8 10 Sources: UNCTAD, DB Research From 1992 to 2005 total FDI inflows to Bulgaria amounted to USD 12.9 bn In 2005, 2nd largest FDI recipient in Eastern Europe (adjusted by economic size) 75% of all FDI inflows since 1992 have been in the form of greenfield / enlargement investments, 25% privatisation-related With a share of roughly 20%, Austria has been the largest investor in Bulgaria since 1992 Financial services, trade and telecoms accounted for 50% of FDI inflows in the last five years Maria Lanzeni October 18, 2006 page 6
Doing business in Bulgaria has become easier Doing Business is getting easier in Bulgaria 1 (best) - 175(worst) Ukraine Croatia Russia Bosnia Herzegovina Macedonia Poland Serbia Hungary Slovenia Bulgaria Czech Republic Romania Slovak Republic Latvia Germany 2006 Estonia 2007 Lithuania Conditions for investment improved compared with last year Low corporate tax 50% tax deductibility for investments Low production costs Strong stability anchors (EU, NATO) 0 50 100 150 Source: World Bank, Doing Business Indicators 2007 Maria Lanzeni October 18, 2006 page 7
Overview 1 Thumbs up for growth and investment 2 Some challenges ahead 3 Euro: All clear? Maria Lanzeni October 18, 2006 page 8
Current account deficit remains high USD bn Current account deficit Net FDI inflows 4.0 At 12% of GDP, the C/A deficit is very big 3.5 Quality of financing has deteriorated 3.0 2.5 2.0 1.5 1.0 Net FDI flows were 9 times larger than C/A deficit in 1998; now they only represent 75% of the deficit Overall macroeconomic / financial risks remain manageable need to monitor microeconomic / counterparty bank risks 0.5 1998 2000 2002 2004 2006F Sources: Bulgarian National Bank, DB Research forecasts 0.0 Maria Lanzeni October 18, 2006 page 9
Strong real credit growth: blessing or curse? Financial intermediation approaching pre-crisis levels Private credit as share of GDP 0 95 96 97 98 99 00 01 02 03 04 05 06 80 70 60 50 40 30 20 10 Financial deepening is a natural feature of the convergence process Financial intermediation is still low by European standards (EU-15 at 120% of GDP) But the speed of adjustment was worrying in 2005 Sources: IMF, DB Research Household credit as driver of credit expansion Index July 2004=100 Credit to households (ex mortgage) Mortgage lending Credit to companies 400 300 200 Real credit growth has slowed down from 60% in March 2005 to around 10% Mortgage loans more than tripled over the last two years Mortgage loans are the main driver of household credit growth 100 07/04 09/04 11/04 01/05 03/05 05/05 07/05 09/05 11/05 01/06 03/06 05/06 Sources: IMF, Bulgarian National Bank, DB Research Maria Lanzeni October 18, 2006 page 10
Array of policies has contributed to lower credit growth Credit growth slowing down Average real credit growth, %, yoy 2000 2002 2004 2006 Bulgaria Hungary Poland Czech Republic Sources: IMF, DB Research 80 60 40 20 0-20 -40 Macroeconomic policies: Monetary and fiscal tightening Increased reserve requirements Prudential and supervisory measures: Stronger regulation and supervision Tighter collateral rules Lower loan-to-value ratios Administrative measures: Credit controls (via marginal reserve requirement), moral suasion Strengthening risk awareness: Market development measures (credit registry, wider information base) Maria Lanzeni October 18, 2006 page 11
Overview 1 Thumbs up for growth and investment 2 Some challenges ahead 3 Euro: All clear? Maria Lanzeni October 18, 2006 page 12
Bulgaria approaching Maastricht criteria, not there yet New EU members & candidates from Central & Eastern Europe EMU convergence Inflation Interest rates 1) Fiscal balance 2) Public debt 2) ERM II Criteria % yoy % of GDP % of GDP fulfilled Aug. 06 Aug. 06 2005 2005 Reference value 2.8 5.6-3.0 60.0 Tension-free participation for at least 2 years Czech Republic 2.3 3.7-2.6 30.5 Managed Float (EUR) 4 Estonia 4.4 3.0 1.6 4.8 ERM II since June 2004 4 Hungary 3.1 6.9-6.2 58.4 Target zone (EUR) 1 Latvia 7.0 3.8 0.2 11.9 ERM II since May 2005 3 Lithuania 3.4 3.9-0.5 18.7 ERM II since June 2004 4 Poland 1.3 5.1-2.4 42.5 Float 4 Slovakia 4.1 4.1-2.9 34.5 ERM II since Nov 2005 3 Slovenia 2.7 3.8-1.8 29.1 ERM II since June 2004 5 Candidates Bulgaria 7.4 3.9 2.3 29.9 Currency Board (EUR) 3 Romania 7.8 5.8-0.8 15.2 Managed Float (EUR) 2 1) Maastricht definition. Other definition: Estonia, Bulgaria, Romania 2) Maastricht definition. Other definition: Bulgaria, Romania Maria Lanzeni October 18, 2006 page 13
Euro accession prospects on par with (or ahead of) CEE-3 countries Fragmented waves of Euro adoption Baseline scenario for ERM II and EMU membership 2004 2005 2006 2007 2008 2009 2010-12 2013-14 Estonia ERM II EMU Latvia ERM II EMU Lithuania ERM II EMU Poland EMU Slovenia ERM II EMU Slovakia ERM II EMU Czech Rep. EMU Hungary EMU Bulgaria ERM II EMU Romania ERMII EMU Source: DB Research While Poland and the Czech Republic fulfil four of the five Maastricht criteria, the lack of political will is likely to delay euro adoption beyond 2010 Hungary is behind in terms of fulfilment of Maastricht criteria 2010 is our baseline scenario for euro adoption in Bulgaria Maria Lanzeni October 18, 2006 page 14
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