Bulgaria - Economic Outlook June 2020

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Bulgaria The economy was growing robustly before the pandemic shock, but in 2020 faces the largest contraction since the late 1990s. While the two-month confinement has been lifted, a rapid recovery is unlikely given continued distancing measures, the vulnerable position of households, and pervasive uncertainty as well as weak external demand, especially from Europe. A second COVID-19 wave in 2020 (the double-hit scenario) would lead to an economic contraction of about 8% and of 0.3% in 2021. Unemployment would in this event almost double after employment had reached historical highs in 2019. On the positive side, the country seems to have to date contained the virus, with a low number of reported deaths. If the virus outbreak subsides by the summer (the single-hit scenario), a more rapid recovery in private consumption and investment would lead to a lower output contraction of 7.1% in 2020.

Increasing resources for the crisis response would support a more robust recovery. Further funding for the health sector is necessary given its relatively low resources. Widening access to unemployment and means-tested benefits, and implementing active labour market policies is a priority given low coverage.

Increasing liquidity support to firms would prevent bankruptcies and help enterprises prepare for a recovery.

Achieving membership of the European Exchange Rate Mechanism (ERM II) and banking union in 2020 would bolster confidence. Further EU resources would help the country expand its crisis response, particularly if financing conditions become further constrained.

Containment measures have so far succeeded The country seems to have contained the spread of the virus to date, with a low number of reported COVID-19 deaths. The first cases were reported on 8 March and the country quickly moved to introduce confinement measures on 13 March. The result is that so far the health system has had to deal with a low number of cases. A second wave of the pandemic would put a greater burden on the health system. While there is a large number of acute care hospital beds, there is a shortage of nursing staff and general practitioners. In addition, the population is relatively old, with a high incidence of circulatory and respiratory diseases.

Bulgaria A double hit would substantially delay the recovery

Social assistance spending will need to rise

Real GDP

Means-tested benefits, excluding old age, 2017

Index 2019Q4 = 100, s.a.

102

% of GDP 5.0

100

4.5

98

4.0

96

3.5 3.0

94

2.5

92

2.0

90

1.5

88

84 82

1.0 0.5

Single-hit scenario Double-hit scenario

2019

0 2020

2021

0

EST LVA CZE LTU SVK BGR ROU SWE HUN LUX POL BEL PRT GRC SVN ESP ITA FIN AUT NLD FRA IRL DEU GBR DNK

86

0.0

Source: OECD Economic Outlook 107 database; and Eurostat.

StatLink 2 https://doi.org/10.1787/888934139081

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

154 _

Bulgaria: Demand, output and prices (double-hit scenario) 2016

Bulgaria: double-hit scenario

2017

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices BGN billion

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

2018

95.1 57.4 14.9 17.6 89.9 0.5 90.4 60.9 56.2 4.7

3.5 3.8 4.3 3.2 3.8 0.6 4.4 5.8 7.4 -0.7

3.1 4.4 5.3 5.4 4.7 1.1 5.8 1.7 5.7 -2.4

3.4 5.8 5.5 2.2 5.1 -1.2 3.8 1.9 2.4 -0.3

-8.0 -7.3 4.5 -10.5 -5.6 -0.8 -6.4 -7.5 -4.0 -2.4

-0.3 -0.3 1.9 -2.6 -0.3 0.0 -0.3 1.3 1.4 -0.1

_ _ _ _ _ _ _ _

3.9 2.1 -0.5 6.2 1.1 35.6 25.3 3.5

4.0 2.8 2.1 5.2 2.0 31.8 22.3 1.4

4.7 3.1 1.8 4.2 2.1 30.3 20.4 4.0

0.6 0.7 0.4 8.0 -3.4 33.7 23.8 2.9

1.3 0.5 0.5 7.8 -3.3 37.0 27.1 2.0

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137371

The shutdown lasted two months until 13 May, but was less severe than in the most hard-hit EU countries.

Large shopping centres, restaurants, parks, amusement/gambling halls, bars and nightclubs were shut, but banks, insurance offices, grocery stores and pharmacies remained open. Mass events were banned.

Workplaces could remain open if they had adequate protection in place for employees. In practice, many employers in service sectors chose to shut down until May. The country has closed its borders to non-EU/EEA and select EU/EEA country nationals, and until early May had in place restrictions on intercity travel.

The widespread shutdown had a large economic impact The temporary shutdown of businesses and travel restrictions together with a reduction in household and company activity in response to the pandemic led to a decline in output beginning in March 2020. The most impacted sectors were construction, wholesale and retail trade, air transport, accommodation and food services, professional activities, arts, entertainment and recreation, other service activities and transport equipment manufacturing, which make up just under a third of economic activity. Employment deteriorated sharply in April 2020, when the registered unemployment rate increased by 2.2 percentage points compared to March.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

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Bulgaria: Demand, output and prices (single-hit scenario) 2016

Bulgaria: single-hit scenario

2017

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2019

2020

2021

Percentage changes, volume (2015 prices)

Current prices BGN billion

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

2018

95.1 57.4 14.9 17.6 89.9 0.5 90.4 60.9 56.2 4.7

3.5 3.8 4.3 3.2 3.8 0.6 4.4 5.8 7.4 -0.7

3.1 4.4 5.3 5.4 4.7 1.1 5.8 1.7 5.7 -2.4

3.4 5.8 5.5 2.2 5.1 -1.2 3.8 1.9 2.4 -0.3

-7.1 -6.3 4.5 -9.5 -4.8 -0.8 -5.6 -6.4 -3.0 -2.2

2.4 1.8 1.9 2.0 1.9 0.0 1.8 6.3 5.4 0.6

_ _ _ _ _ _ _ _

3.9 2.1 -0.5 6.2 1.1 35.6 25.3 3.5

4.0 2.8 2.1 5.2 2.0 31.8 22.3 1.4

4.7 3.1 1.8 4.2 2.1 30.3 20.4 4.0

0.6 0.8 0.4 7.6 -3.3 33.6 23.7 3.0

1.3 0.6 0.6 6.3 -2.9 36.4 26.5 2.7

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137390

The macroeconomic policy response to COVID-19 has been constrained The macroeconomic policy response to the pandemic has been less powerful than in many EU countries due to a weaker fiscal policy response and restrictions on monetary policy, given the existing currency board. Budget measures amount to about 1.3% of 2019 GDP. These measures focus on a restructuring of spending, including increased resources for the health system, and a job subsidy scheme for the most impacted sectors, whereby the government pays 60% of salaries for employees with employers paying the remaining 40%. In addition, the government is increasing the capital of the Bulgarian Development Bank to provide liquidity support to firms and has retargeted EU resources towards crisis-oriented programmes.

The Bulgarian National Bank (BNB) is taking measures aimed at preserving the stability of the banking system and strengthening its flexibility through an increase in banking system liquidity, full capitalisation of profits in the banking system, and the cancellation of the increase in the counter-cyclical capital buffer planned for 2020 and 2021 (totalling 0.6% of 2019 GDP). The ECB and the BNB put in place a swap line of EUR 2 billion to provide euro liquidity in April.

The economic contraction will be the largest since the late 1990s A double-hit pandemic wave is set to reduce real GDP by 8% in 2020 — a contraction not experienced since the crisis years of the late 1990s. The single-hit scenario is projected to lead to a lower fall in output of 7.1% in 2020. A rapid recovery in 2020 is unlikely given continued distancing measures, the vulnerable position of households to an income shock given low incomes and high informality, a cautious return to full production and investment in the private sector, and the weak European economy. Growth is expected to

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

156 _ return in 2021 only in the single-hit scenario. The unemployment rate is set to rise from historical lows to 8% in 2020 in the double-hit scenario. Despite low levels of public debt and a strengthened banking system that has benefitted from a reduction in non-performing loans, the response to a worsening crisis would be constrained if access to long-term financing deteriorates. Joining the European Exchange Rate Mechanism (ERM II) and the banking union in 2020 remains the key focus of the government’s economic strategy.

This would mitigate risks by raising confidence.

Restarting the economy may require stronger policy support Low public debt provides the fiscal space for a larger response to the crisis, if required. Spending on health is low and further funding is necessary to prepare for a potential second pandemic wave. Measures to support firms and households may need to be expanded, particularly if there is a further virus outbreak.

Unemployment could rise further, particularly if the government’s wage subsidy scheme finishes in July without being replaced by new employment/active labour market polices with a similar impact. Widening access to unemployment benefits and means-tested social assistance is a priority. Continuing to address the gaps in the insolvency regime becomes ever more urgent given the likely rise in private sector indebtedness and bankruptcies. It will be important to reverse the tendency for large public investment cuts in downturns given infrastructure needs. Access to additional EU resources would help the country to expand its crisis response.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020