Quarterly revision of the macroeconomic projections

Dimitar Bogov Governor

January, 2013

CONTENTS

• Macroeconomic projections for 2013 -2014

• External assumptions

• Main macroeconomic scenario for 2013 -2014

• Comparison with the previous projection

Macroeconomic projections for 2013-2014

External environment

In the period between the two projections:

Minor deterioration of the global economic prospects...

...in presence of further monetary stimulus, provided by ECB and FED...

...expectations for negative GDP change in the Euro area in 2013 and slight recovery in 2014.

Foreign demand

More evident decrease in the foreign effective demand in 2013 relative to the previous projection, as well as expectations for more moderate recovery in 2014

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014

Decomposition of foreign effective demand growth(weighted contributions to annual foreign effective demand growth rates)

Croatia

Bulgaria

Serbia

Netherlands

Italy

Spain

Greece

Germany

Belgium-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

2010 2011 2012 2013 2014

Foreign effective demand(annual growth rates, %)

October 2012 January 2013

0.5

-1.4

-0.1

-1.7

0

-0.5

1.0

1.4

Foreign effective inflation

In the last quarter of 2012, the foreign effective inflation

substantially beyond the expectations Upward revision for 2013 and moderate downward

correction for 2014 Significant dynamics acceleration in 2013 and

deceleration of the foreign prices growth in 2014

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014

Foreign effective inflation(annual rates, %)

October 2012 January 2013

1.32.9

3.4

0.9

4.2

2.3

1.42.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014

Decomposition of foreign effective inflation(weighted contributions to annual foreign effective inflation rates)

Bulgaria

Austria

U.S.

Slovenia

Serbia

Italy

Croatia

Greece

Germany

France-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014

Decomposition of foreign effective inflation(weighted contributions to annual foreign effective inflation rates)

Bulgaria

Austria

U.S.А.

Slovenia

Serbia

Italy

Croatia

Greece

Germany

France

World prices of the basic products

Downward revision of the global commodities’ prices for 2013, but upward revision for 2014 compared to the October projection

The metal prices, after their drop in 2012, are expected to stagnate in 2013 and increase slightly in 2014

After the increase in 2012, the oil prices are expected to decrease in 2013 and 2014

After the increase in the corn and wheat prices in 2012, the price of wheat is expected to mount in 2013 and 2014, whereas the price of corn, which is expected to decline.

annual changes, %

Exchange rate

USD/ EURCrude oil Crude oil Export metal

price index Nickel price Copper price Wheat price Corn price

(increase = appreciation

of EUR)

(USD per barrel)

(EUR per barrel)

(EUR based, 2005=100)

(USD per metric tonne)

(USD per metric tonne)

(EUR per metric tonne)

(EUR per metric tonne)

Forecast January 2013 2011 5.0 39.3 32.5 15.3 5.0 17.0 34.8 49.42012 -7.5 0.9 9.1 -6.1 -23.4 -9.8 7.5 11.32013 -1.2 -5.7 -4.6 0.3 -0.6 -1.4 9.5 -3.32014 -1.1 -4.4 -3.4 1.7 1.3 0.4 2.3 -7.3

Forecast October 2012 2012 -8.5 0.9 10.3 -6.1 -22.6 -9.3 8.8 11.42013 -3.2 -5.3 -2.1 2.0 3.2 3.4 15.6 1.22014 0.6 -5.1 -5.7 0.0 0.8 -0.2 -6.7 -10.9

Foreign interest rate

The foreign interest rate continued to decrease, in conditions of recession delay and steadiness of the ECB key rate in July

Downward revision compared to the previous projection Expectations for moderate increase in 2013 and 2014

00.20.40.60.8

11.21.41.61.8

2

2010 2011 2012 2013 2014

Euribor - 1 month(quarterly average, in %)

October 2012 January 2013

Macroeconomic projections for 2013-2014GDP

Materialization of part of the risks for deterioration of the global economic environment

Almost unchanged perceptions of the labor market and foreign investments, but expectations for smaller credit activity

Maintenance of the assessment for economic stagnation in 2012 and downward revision of the GDP projection for 2013 и 2014

Gradual recovery in 2013 and 2014 expectations for positive effects of the structural changes on the exports expectations for solid domestic demand growth

Covering of the negative output gap in the second half of 2014

2.8 3.0

0.0

2.63.4

2.8 3.0

0.02.2

3.0

-3.0-2.0-1.00.01.02.03.04.05.0

2010 2011 2012 2013 2014

GDP(annual growth rates, in %)

October 2012 January 2013

-4

-3

-2

-1

0

1

2

2010 2011 2012 2013 2014

Output gap(in %)

October 2012 January 2013

Macroeconomic projections for 2013-2014GDP components

Strong increase in the exports in 2013 and 2014, with expectations for continuous recovery of the foreign demand and world metal prices and positive effect of the activities of the new facilities on the export potential

Larger import pressures by export and domestic demand in 2013, especially in 2014

Increase in the domestic demand in 2013 and moderate growth intensification in 2014, underpinned by the announced direct and public investments and favorable developments with the labor market Annual growth rates (in %, seasonally adjusted data)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -4.7 0.6 0.4 -16.0 -14.1 -2.9 -10.82010 2.8 1.4 -2.0 -4.6 23.2 8.9 -0.3 -14.62011 3.0 4.0 0.6 13.5 11.8 13.8 5.4 18.32012 0.0 -0.1 1.7 9.7 -0.8 3.3 2.2 12.62013 2.2 1.3 0.5 8.1 7.4 6.5 2.7 4.92014 3.0 3.7 0.3 7.4 10.4 9.8 4.1 8.8

Contributions to annual growth (in p.p.)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -3.8 0.1 0.1 -6.9 9.5 -3.6 2.62010 2.8 1.1 -0.4 -1.1 8.4 -5.2 -0.4 3.22011 3.0 3.1 0.1 3.1 5.1 -8.5 6.3 -3.42012 0.0 -0.1 0.3 2.5 -0.4 -2.3 2.7 -2.72013 2.2 1.0 0.1 2.3 3.4 -4.6 3.4 -1.22014 3.0 2.9 0.0 2.2 5.1 -7.2 5.1 -2.1

Macroeconomic projections for 2013 -2014balance of payments’ current account

After the increase in the net inflows from private transfers in 2012, nominal stagnation in 2013, and decrease in their share in GDP, given moderate nominal growth in 2014, is expected

After the increase in the trade deficit in 2012 (mainly as a result of one-time factors), similar level also for 2013 and its increase in 2014, is expected

Slight movement of the current account deficit in 2012 and gradual widening of the deficit in 2013 and 2014

% of GDP 2009 2010 2011 2012 2013 2014

Current account balance -6.8 -2.0 -3.0 -3.2 -3.8 -5.4

of which:

Trade balance -23.3 -20.5 -22.4 -23.3 -23.4 -24.5

Current transfers, net 16.9 19.4 19.7 21.0 20.0 19.8

Macroeconomic projections for 2013 -2014capital inflows

Lower net inflows in the capital and financial account in 2012 compared to 2011, given lower foreign indebtedness and lower foreign direct investments

Stable capital inflows in 2013 and their increase in 2014, as a result of the expectations for higher direct investments and larger foreign borrowing of the Government

Significant increase in the foreign reserves in 2012 (Euro 124 million) and assessments for further increase in the following two years, thus expecting maintenance of the foreign reserves on adequate level

2.7

4.1

7.1

2.0

6.8

4.7 4.76.9

0.01.02.03.04.05.06.07.08.0

2010 2011 2012 2013 2014

Net capital inflows(% of GDP)

October 2012 January 2013

2.2

4.5

1.0

3.0

4.5

0.0

1.0

2.0

3.0

4.0

5.0

0

100

200

300

400

2010 2011 2012 2013 2014

Foreign direct investment

millions of EUR as % of GDP (right scale)

Macroeconomic projection for 2013 -2014inflation

Downward revision of the projected inflation for 2013 (from 3.5% to 3.2%) and assessment for its stabilization in 2014 (2.3%) on the level close to the historical average

Absence of demand pressures – negative production gap until the middle of 2014

Downward pressures of the oil prices in the current and in the following year

The world food prices, due to the factors on the supply side, still upwards in the first half of 2013 and exhaustion of their inflationary pressure in 2014

Expected increase in the regulated prices in the domestic economy in 2013

-4-3-2-10123456

2010 2011 2012 2013 2014

Output gap and inflation(in %)

Output gap Inflation

Macroeconomic projections for 2013-2014credit growth

– The credit growth in 2012 equaled 5.4% (lower than expected), and in the following two years its moderate acceleration is expected, given further deposit growth and available foreign sources of financing

– However, the uncertain global environment, the banks’ risk perceptions and the business strategies of the European banking groups that are also present on the domestic market, can produce larger caution of the domestic banking sector about the credit policy

– The banking system remains to register high capital adequacy ratio (17.1%), high liquidity and moderate increase in the non-performing loans (10.6%) in the third quarter of 2012

3.04.05.06.07.08.09.0

10.011.012.0

2010 2011 2012 2013 2014

Total loans(annual growth rates, %)

October 2012 January 2013

Comparison with the previous projection

Slight downward revision of the GDP growth from 2.6% to 2.2% and from 3.4% to 3% in 2013 and 2014, respectively - higher initial base- deteriorated expectations about the foreign demand-poorer credit support, in conditions of deteriorated risk perception of the banks- almost unchanged perceptions about the labor market and foreign investments- export and investment activity – remain to be the main factors for economic growth

Downward revision of the inflation from 3.5% to 3.2% for 2013 and from 2.6% to 2.3% for 2014

- lower initial conditions - smaller inflationary pressures from the import food and energy prices - still no pressures of the domestic demand

External position- higher current account deficit in 2012 (from 2.8% to 3.2% of

GDP, mainly caused by one-time factors), given the upward revision with the capital flows- unchanged current account in 2013 (worsened expectations for the trade, but better for the current transfers) and higher capital inflows due to the higher external indebtedness of the Government- lower current account deficit for 2014 and slightly smaller capital inflows-higher accumulation of foreign reserves on a medium-run

Summary

Economic stagnation in 2012 and moderate increase in the following two years, given expected new private and public investments;

Lower inflation rate in 2013 and more substantial deceleration in 2014;

The capital inflows in 2013 and 2014 are expected to be sufficient for covering the current account deficit and additional accumulation of foreign reserves;

It is estimated that the foreign reserves on a medium-run will maintain on adequate level, reflecting the capability of the economy to mop-up the potential negative shocks;

Further risks of the scenario regarding the changes and the uncertainty in the external environment, imposing a need of further regular monitoring of the macroeconomic developments, and if needed, reaction by taking adequate measures.