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Bulgaria GDP growth is projected to slow to 1.7% in 2023 before rebounding to 3.1% in 2024, supported by investments from EU funds. Exports will be adversely affected by the deteriorating macroeconomic situation in Europe, while high energy prices and rising interest rates will weigh on consumption. Inflation will slowly decline amidst stabilising energy prices and subdued economic activity. Energy supply is secured thanks to low dependence on gas, a new pipeline, and a position as a net exporter of electricity. Bulgaria is assumed to enter the euro area at the start of 2024. Effective management and roll-out of EU funds is required to support activity and to return to the pre-crisis convergence path towards OECD-average per capita incomes. Support packages, including price caps on electricity along with VAT and excise tax reductions on gas, have shielded consumers and businesses from rising energy prices, but the measures should be better targeted and designed to preserve incentives for energy savings. Investments in renewable energy need to be encouraged as they would help to align efforts to decarbonise the economy and address energy security concerns. Bulgaria faces weaker growth and high inflation GDP growth remained robust in the first half of 2022 as exports remained strong and inventories surged. Business confidence has softened slightly, signalling increased uncertainty amid heightened energy prices and expectations of rising interest rates. High inflation is weighing on private consumption, but consumer confidence has improved after an initial drop in 2022. Labour shortages are significant, and unemployment remains low. In contrast with most OECD countries, real wage growth has held up albeit at a slower pace due to high nominal wage increases and regulated energy prices.

Bulgaria

1. Business confidence is expressed by the total business climate indicator, covering industry, retail trade, construction and the service sector. 2. Average balance of opinions about selling price expectations in the business surveys for industry and retail trade. Source: National Statistical Institute. StatLink 2 https://stat.link/4ambkr

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

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Bulgaria: Demand, output and prices 2019

Bulgaria GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ 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) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition³ (% of GDP) Current account balance (% of GDP)

2020

_ _ _ _ _ _ _ _ _

2022

2023

2024

Percentage changes, volume (2015 prices)

Current prices BGN billion

120.4 71.1 20.1 22.2 113.4 2.6 116.0 77.5 73.1 4.4

2021

-4.0 0.0 7.9 0.6 1.6 -1.3 0.1 -10.3 -4.3 -4.0

7.1 8.4 0.6 -6.6 3.7 3.6 7.3 10.9 10.9 0.3

2.8 2.9 4.6 -4.6 1.9 3.7 5.6 5.6 10.3 -2.7

1.7 2.1 0.8 13.9 3.9 0.1 3.6 2.8 5.3 -1.6

3.1 2.8 1.2 5.8 3.0 0.0 2.8 6.0 5.6 0.3

4.3 1.7 1.2 5.1 8.1 -3.8 34.8 24.6 0.0

7.5 3.3 1.4 5.3 6.4 -3.9 35.1 24.0 -0.5

13.7 14.1 7.0 5.0 7.3 -4.8 39.2 28.1 -1.0

7.8 7.5 6.4 5.2 7.4 -4.3 42.7 31.6 -2.5

5.2 4.8 4.8 4.8 7.0 -3.0 44.8 33.6 -2.6

1. Contributions to changes in real GDP, actual amount in the first column. 2. Consumer price index excluding food and energy. 3. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value. Source: OECD Economic Outlook 112 database.

StatLink 2 https://stat.link/wuyj5z

Bulgaria is facing headwinds from weak growth in its main trading partners, with trade with Russia and Ukraine relatively limited but stable. Gas plays only a minor role in Bulgaria’s energy mix which is dominated by nuclear and coal-based electricity that is produced at low cost and exported to neighbouring countries. Bulgaria saw a strong inflow of Ukrainian refugees, but many of them have already left the country. Energy support measures, implemented since autumn 2021, need to be more targeted and gradually phased out where possible.

Extensive policy supports have been put in place Inflation pressures from energy and food prices are cushioned by means of several temporary support schemes including price caps on electricity, subsidies for fuel and tax cuts for gas and bread. Tax exemptions are implemented until mid-2023 and 2025 for some excise duties, while the other short-term measures have recently been extended until the end of 2022 with total costs of around 3.2% of GDP for 2022 as a whole. It is expected that support programmes will be gradually scaled back and become more targeted, although the implementation of additional fiscal policy measures is subject to the formation of a new government. If current commitments implemented until the end of the year are upheld in 2023, the budget deficit would exceed 4.3% of GDP in 2023, breaking with the historically rather prudent fiscal approach. Nevertheless, a more conservative approach involving gradual consolidation is expected. Monetary conditions will be closely aligned with those in the euro area under the currency board. Accordingly, ongoing ECB tightening will contribute to reducing inflation. OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

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A resilient rebound is expected after the near-term slowdown Bulgaria is facing headwinds from the global macroeconomic situation but will start to recover quickly in 2024 supported by public and private investments driven by EU funds. Deteriorating economic conditions and increasing uncertainty in key trading partners will slow exports and dampen consumption in 2023. The implementation of EU-funded projects has been delayed, but is expected to strengthen in 2023, helping to achieve GDP growth of around 1.7%. Rising interest rates will weigh on activity but headline inflation will moderate from historically high levels of around 14% in 2022 on a year-average basis to around 7.5% in 2023 followed by a further gradual decline in 2024. Core inflation will only marginally decrease in 2023 to around 6.4% and slowly align with headline inflation by 2024 as the pass-through from higher interest rates continues. The labour market will remain resilient with only a marginal increase in unemployment in 2023, but widespread labour shortages will keep unemployment low and real wage growth positive at around 1%. Upward risks to the inflation outlook are created by stronger second-round effects from further wage increases coupled with considerable government spending and investment. Political uncertainty places planned investments at risk. There is also a risk of maintaining support measures longer than necessary and delaying fiscal consolidation.

Structural reform needs are pressing Effective management of EU funds is key for sustaining activity and boosting potential growth. Strengthening the convergence process requires pursuing and deepening reforms to encourage and intensify investments in infrastructure and digitalisation, reduce administrative burdens including improvements to the insolvency framework, strengthen efforts to fight corruption – for example by guaranteeing the accountability of prosecutors – and increase competition. Energy security is currently not a concern, but the decarbonisation of the economy will require considerable further efforts, including an accelerated installation of renewable energy production. Where necessary, the extension of energy support measures in 2023 should be better targeted with a view to gradually reduce fiscal costs.