site.btaEuropean Commission Presents Report on State of Bulgarian Economy

The European Commission (EC) Tuesday presented a report on the state of the economies in the EU member states. In the section on Bulgaria in the Alert Mechanism Report 2023, it is noted that there are concerns related to cost competitiveness and corporate debt, although the associated risks seem limited.

According to the report, cost competitiveness pressures, which existed already before the COVID-19 pandemic, persist. Nominal unit labour costs have been increasing strongly in recent years and are expected to continue doing so, in context of very high core inflation, labour shortages and strong nominal wage increases. 

Non-financial corporate debt remains high compared to regional peers and is in excess of fundamentals but is on a declining path. In the previous round of the MIP, the Commission did not carry out an in-depth review and did not identify macroeconomic imbalances for Bulgaria. This year, the Commission does not consider it necessary to carry out further in-depth analysis for Bulgaria.

Real GDP growth in Bulgaria is forecast at 3.1% in 2022 and 1.1% in 2023. Inflation is high, including in comparison to many of Bulgaria’s euro area trading partners. Year-on-year, it increased to 15.6% in September, with core inflation estimated at 9.4%. Wages are set to rise rapidly, in line with prices, the assessment shows.

Nominal unit labour cost growth exceeded the threshold last year. The EC notes that after some edging up in 2020 amid the COVID-19 crisis, the non-financial corporate debt-to-GDP ratio decreased again in 2021, to 59.5%. It decreased further in the first half of 2022, but there are risks associated to the macroeconomic environment. As for many other non-euro area Member States, the share of corporate loans denominated in foreign currency is high. Corporate indebtedness is flanked by high liquidity buffers, which mitigates risks, but non-performing loans are present. The household debt-to GDP ratio is below prudential and fundamentals-based benchmarks, but the predominance of variable rates for housing loans exposes indebted households to the risks of higher interest rates. 

According to the report, concerns associated to house price developments are present. Nominal house price growth accelerated from 4.6% to 8.7% in 2021. Nominal year-on-year house price growth increased to 14.6% in the second quarter of 2022. Valuation gap metrics do not show signs of potential overvaluation.

In the banking sector, concerns mostly related to the quality of its assets remain. The non-performing loans ratio declined further to 4.8% in 2021 but it remains well above the EU average. The ratio of underperforming loans and forborne loans, which increased after the pandemic, remains high as well, the monitoring shows.