2012: The economy will slow down
2011-12-22 12:26:08
Indications about the debt crisis in the eurozone getting worse raised the political will for the implementation of much-needed structural reforms.
The government started a pension reform and made efforts to restructure and privatize the remaining non-performing state-run companies. The Bulgarian economy consolidated its position and reduced criticism form internal political opponents.
It seems there would be no need of further restriction of the fiscal policy in 2012. The public sector will have low to no contribution to the GDP growth in 2012. All this would not be enough to compensate the negative effects of the slow recovery in the eurozone. GDP will drop from 2% in 2011 to 1.5% in 2012. Export will contract. Indebtedness of the corporate non-financial sector will fall.
In 2012 there will be fewer obstacles in front of Bulgaria’s recovery. Most elements required for solving the government debt crisis in the eurozone are now present.
Reducing the indebtedness of the corporate non-financial sector and the adaptation of the real estate market to the new environment will not be completed in 2012. There will be another 2 or 3 years with economic growth lower than the potential.
The expectations for the banking sector 2012 will resemble 2011 in many aspects. Accumulating provisions will continue with the same speed. Two preconditions will be needed for banks to able to absorb losses:
First – residents’ deposits should continue growing. This will allow banks, dependent on foreign financing, to consolidate their positions.
Second – a key factor will be the implementation of the plan for restructuring of Greece’s sovereign debt. This will improve the situation of Greek mother banks and will allow them to raise financial aid for their subsidiaries on the Balkans and Bulgaria in particular.
Bulgarian banks still will be encouraged by local authorities to increase buffers and liquidity. A decisive factor will be the reduction of administrative expenses but without reduction of the services offered in remote areas of the country.
Complete recovery of the Bulgarian banking sector will take time. The process is likely to be completed in the end of 2014. Indebtedness reduction of the corporate non-financial sector will be over by that time and GDP growth will be close to the potential, return of capital in the banking sector is expected to be 5 – 10% higher than the price of the capital.