OECD Economic Outlook, Volume 2020 Issue 2

Bulgaria

The first COVID-19 outbreak was smaller in Bulgaria than in many countries and the economy less severely impacted by confinement measures than expected in the first half of 2020. An economic contraction of 4.1% is expected in 2020 to be followed by a recovery, with growth of 3.3% in 2021 and 3.7% in 2022, driven by rising domestic demand and a moderate rebound in exports. Fiscal support for households and firms and high public investment are central to the strength of the recovery. Private investment will remain subdued given substantial uncertainty.

Low public debt and high fiscal reserves, together with EU financial resources, will allow the government to sustain and expand its fiscal assistance. The government’s wage subsidy scheme will keep unemployment down, and rises in public wages and social benefits in 2021 will provide a boost to household incomes. With effective planning and implementation, the large EU-funded public investment programme has the ability to increase potential growth. Reforms to ease access to insolvency and firm rehabilitation proceedings have taken on an added urgency.

COVID-19 cases surged in autumn 2020 from an initially low level

Bulgaria avoided the worst of the initial COVID-19 outbreak, with a comparatively low number of cases and deaths. Following the easing of confinement measures, new cases began to increase in July and a surge in infections occurred from October. While the country benefits from having a large number of acute care hospital beds, the sharp rise in infections is proving a challenge for the health system. The government responded at the end of November by closing hospitality establishments, shopping malls, and education facilities. Education has been moved online where possible.

Bulgaria: Employment and lockdown

1. A composite indicator based on nine sub-indicators including school closures, workplace closures, and travel bans.

Source: OECD Economic Outlook 108 database; and European Center for Disease Prevention and Control (ECDC) though Our World in Data, Oxford COVID-19 Government Response Tracker.

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Bulgaria: Demand, output and prices

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The economic contraction was milder than expected

Confinement measures have been less severe and the fall in economic activity lower than in many OECD countries, with economic output having shrunk by 5.2% year‑on‑year in the third quarter of 2020. The reopening of businesses and the relaxation of containment measures were accompanied by a recovery of activity that took on momentum in July. Manufacturing had almost returned to December 2019 activity levels by September 2020, and goods exports have started to recover. Services, including tourism, passenger transport and retail, have been slower to bounce back. Employment fell sharply and unemployment has increased from pre‑crisis record lows. Inflation fell, driven not only by the fall in international energy prices, but also by the slowdown in core inflation and the cut in regulated natural gas and heating prices. The surge in the pandemic has affected the recovery and economic activity is expected to slow down substantially in the fourth quarter due to the growth in the number of cases from October and as the lockdown hits at the end of November.

The fiscal response has moderated the rise in unemployment

The government implemented fiscal measures to assist firms and households in March and has extended support as the impact of the pandemic endured. Financing of the measures, estimated to be about 3% of GDP for 2020, has come from national and EU resources. The government’s wage subsidy scheme has prevented a sharper rise in unemployment. It protected jobs of around 7% of the labour force in the second quarter of 2020, while helping the most impacted firms with their labour costs. Support programmes are expected to remain in place for 2021 and further increases in public wages and social benefits are to be introduced. EU funding is due to be high with strong investment expected at the beginning of the next programming period in 2021 and substantial resources, of about 10% of pre‑crisis GDP, to come from the EU Recovery and Resilience Facility.

Continued fiscal support is critical for the strength of the recovery

A recovery is underway, but its path remains uncertain, particularly given the current large rise in COVID‑19 infections. The economy is expected to shrink by 4.1% in 2020, but is projected to recover to its pre‑crisis level in 2022. Fiscal support will determine the strength of the recovery, with a large shift from pre‑crisis fiscal surpluses to projected deficits of over 4% of GDP in 2020 and 2021. The surging pandemic will weigh on business confidence and private investment, and sporadic outbreaks will hold down growth until vaccination against the virus becomes general. Strong public investment, financed by EU resources, will then drive the revival of investment. Trade is set to recover gradually, contributing positively to growth in 2021 and 2022. The reintroduction of confinement measures is a significant downside risk that would constrain the normalisation of domestic demand.

Substantial EU resource flows represent an opportunity

Low public debt and high fiscal reserves, and EU financial assistance, put Bulgaria in a solid position to avoid withdrawing fiscal assistance prematurely. Firms may require additional credit support, particularly if the current debt moratorium is not extended. Resources should be targeted to liquidity‑constrained, but otherwise viable, enterprises. Progressing rapidly with the reforms identified to improve access to insolvency and rehabilitation proceedings has become an even greater priority. Continued focus on increasing competition, reducing the cost of red tape for businesses and fighting corruption remains critical for increasing potential growth. The large planned increase in public investment, due to EU resources, represents an opportunity to close the gaps in housing efficiency and transport infrastructure, increase innovation and speed up the transition to a more digitalised and less carbon‑intensive economy. It will be important to strengthen capacity to ensure an effective and rapid use of the available EU funding.