Industrial Export Drives Bulgaria's Economic Boost in 2010 Q3

Bulgaria's industrial export is the key factor for the recovery of the economy but its structure is nonetheless a matter of concern, according to a report of the Sofia-based Center for Economic Development.

Experts from the CED presented Thursday in Sofia their quarterly report for the condition of the Bulgarian economy.

They say that Bulgaria's economy grew by 1% in the third quarter of 2010 year-on-year, and will register a near zero-growth in 2010 altogether. The economy started growing in the second quarter but only by 0.5% compared with the first quarter of 2010.

The CED report points out the crucial role of the Bulgarian industry for the recovery of the economy as a whole. In the first three months of 2010, it registered a 2.2% increase compared with the last quarter of 2009, and a 1.3% year-on-year growth. In the second quarter, however, it grew only by 0.04% compared with January-March 2010, and 2.9% year-on-year.

According to the analysts, the major factors for the Bulgarian economic recovery are the improved international economic environment, and the growth of the European economy.

Yet, the head of the CED, Georgi Prohaski, has pointed out that there are reasons to be concerned about the structure of the Bulgarian industrial export because of the relative absence of products with high added value.

The coal extraction is a major contributor to the growth in the processing industry, while the production of food, tobacco, clothes is expected to see further declines.

The economists see a positive trend in the construction sector, which, however is limited only to a slowdown of the staggering decline from last year. The new dynamic in the construction sector is based on mainly on infrastructure construction. In the fourth quarter, the CED expects to witness reversal of the decline in retail trade and a zero decline in construction.

The report emphasizes the 32% increase in exports and 7.2% increase in imports as positive trends in the third quarter but it is not without misgivings in that respect. In the first 8 months of 2010, Bulgaria's exports amounted to EUR 9.8 B.

"60% of the exports is based on raw materials and energy resources. The share of the innovative products must be increased. The 13% decline of the import of investment goods means that companies are not investing in improving their manufacturing," Prohaski said.

The only tangible increase of exports of goods with higher added value is in the production of car parts after the launch of two new factories.

Bulgaria's imports amounted to EUR 11.86 B in January-August 2010.

Another matter of concern mentioned by the CED report is the reduced inflow of foreign direct investment in Bulgaria – EUR 835.9 M in the first eight months of the year, compared with EUR 2.1 B in the same period of 2009.

Nonetheless, forecasts say Bulgaria's FDI could come close to EUR 2 B by the end of year, and could grow up by as much as 20% in 2011 year-on-year.

Because of that, the Center for Economic Development predicts a smaller economic growth in 2011 than the government projection of 3.6%.

"The projected 3.6% in the draft budget are too optimistic. We think the maximum GDP growth next year will be 2-2.5%, while Bulgaria needs much more than that – about 6%," Prohaski said urging the allocation of more funds for innovation and education.

The experts of the CED predicted that at the end of 2010 Bulgaria's inflation will be about 3.5%.

In their words, Bulgaria's budget deficit is due to the underperformance of tax collection in January and February 2010, contrasted with more tax revenues in April-September. They believe that if the improvement in that respect continues, Bulgaria might end 2010 with a deficit that is smaller than the projected BGN 3.2 B.

In the third quarter of 2010, Bulgaria's fiscal reserve became growing again – by BGN 1.2 B compared with the second quarter. At the same time, the money base rose from BGN 12.3 B in the first six months of the year to an average of BGN 13.1 B in the third quarter, which is the first time it exceeds BGN 13 M in the past 21 months.

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