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Bulgaria Has Good Medium-Term Prospects for Growth

Date: 07.11.2009

Bulgaria's medium-term prospects for growth remain favorable despite a number of vulnerabilities, linked to external financing needs and the risk of assets deterioration, the European Bank for Reconstruction and Development said in its latest report on transition economies.

"Bulgaria has a well capitalised and well regulated banking sector while the central bank holds a large amount of foreign reserves. The overall fiscal position is also sound with fiscal reserves in excess of the low level of gross public debt, and Bulgaria’s history of fiscal surpluses reflects an understanding across the political spectrum of the importance of fiscal prudence in the context of the currency board arrangement,“ the bank said.

The Bulgarian economy is forecast to shrink by 6 % in 2009, with only a modest recovery starting in 2010.

The benefits of the integration of eastern Europe’s financial systems into the world economy outweigh the costs that have been highlighted during the global economic crisis, the EBRD has concluded in the report.

The report also says that the global crisis has disrupted the pace of economic reform in eastern Europe, but there have been no significant reversals. Governments remain committed to the process of economic reform.

Entitled “Transition in Crisis?”, the 2009 report concludes that while the economies of the transition region have been dealt a severe blow, the transition process itself will survive the onslaught of the worst global economic downturn in generations.

“The fundamental growth model for the region remains intact,” commented Chief Economist Erik Berglof. “However, the crisis has highlighted weaknesses. There are lessons to be learnt,” he added.

The report stresses that the crisis has shown the need urgent steps to help reduce dependency on foreign exchange lending and to manage more effectively the demand for credit.

Looking ahead to the impact of the crisis on further market reform in the transition region, the report says any new surge in reforms generally is unlikely, even though the financial sector will probably see both institutional change and policy adjustments, including initiatives to increase both the quality and the extent of government regulation.

According to the EBRD the 1997-98 Asian crisis arguably shares the most similarities with the present crisis in the transition region.

The bank concludes that while output declines have been comparable across the crises, financial distress has been thus far more contained in the present crisis in terms of capital outflows and local currency devaluation.

“Unlike currencies during the Asian crisis, eastern European currencies did not go into freefall for extended periods of time,“ the report said.

"Some currencies in the region depreciated by as much as 25 per cent in real terms between September and March, and several countries, including Bulgaria, Latvia, Russia and Ukraine, suffered heavy reserve losses. Only in Ukraine, however, did the currency declines resemble currency collapses typical of past emerging market crises, such as the Asian crisis."

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