Profit.bg discussed with experts from the Agency for Economic Analyses and Forecasting (AEAF) the consequences for Bulgaria from a recession in the Western countries, the effect on the banking system and the last time Bulgarian economy was in recession:

What will be the consequences for Bulgaria from a possible recession in the major European economies?

The insecurity on the global financial markets that we have been witnesses to since the end of 2007 and the slowdown in the growth of some of the big economies is expected to affect the Bulgarian economy in two ways.

The price of international credit resources will temporarily increase and local investors will be more cautious with their investment decisions on one hand. This may result in a decline in real estate investments, which in turn will result in a decrease in their share of the foreign direct investments in Bulgaria.

This will hold value mainly in terms of the purchases of residential properties by foreign citizens, while the demand for business properties is expected to remain strong due to the insufficient supply of business and commercial buildings.

On the other hand, a slowdown in EU's economy may result in a decline in foreign demand.

As a result a slowdown in Bulgarian economy may be expected, as well as a decline in the volume of FDI and its restructuring.

After all Bulgaria's economic development data give no grounds for serious concerns. The country has managed to overcome the challenges offered by the foreign environment.

Has the risk for some the sectors of the economy increased recently?

Theres is a certain risk of a slowdown in the growth of residential construction. We believe that the good development of the construction of business and office buildings and infrastructure sites, will offset successfully this slowdown and the growth rate in the construction sector is expected to remain high.

Despite the turmoil on the global financial markets, the Bulgarian financial sector is developing successfully. Bulgarian banking institutions maintain high capitalization and liquidity levels, which helps them weather this difficult period.

The development of the local stock exchange was strongly influenced by the turmoil on the global stock markets and this was one of the sectors where the risk has risen this year.

Will the GDP growth rate for 2008 be revised?

AEAF publishes official estimates for a specified number of economic indicators twice a year, in accordance with the existing procedures.

The GDP is expected to grow by 6.2% in real terms, according to the latest forecast. The next official forecast will be published in the autumn and there are no signs at this point that the indicator will be revised down.

Taking into consideration the GDP growth in the first quarter of the year and NSI's estimates about the second quarter, the forecast GDP growth for 2008 may be even higher.

Is it possible for the Bulgarian economy to slip into recession?

All future scenarios – favorable or unfavorable are possible. Nevertheless, the possibility of Bulgaria sliding into recession in the next few years is a lot smaller than the possibility of retaining the high growth rate. AEAF's forecast for the economic development of the country over the next three years unequivocally supports this hypothesis.

What effect would a slowdown of the economy have on the banking sector?

If economy growth slows down over the next year or two, there will be a certain slowdown in credit growth as well. It will come as a result of the lower investment activity and the weaker demand for investment loans.

The global financial insecurity will also limit the newly-extended funding from the parent banks to their Bulgarian units. Commercial banks may be expected to increase the interest rates on deposits, in order to offset the lower amount of additional financial resources.

The interest rates on loans are also expected to increase but at a slower pace, which means that the interest spreads will be compressed. The growth in the financial intermediation sector will probably decline in case of an economy slowdown.

When was the last time Bulgaria slipped into recession and what were the reasons for this? Can а comparison between the situation then and now be made?

When recession is mentioned people usually think of 1996 and the beginning of 1997. It is quite obvious that the factors that affected the economic development then have nothing in common with the ones that are in effect today.

We could also say that Bulgaria was in a similar condition in 1999, when the real GDP growth stood at 2.3%.

A few things, however, have to be mentioned when speaking of that period of time. The bulk of the privatization in the country was carried in the period 1997 - 1999 and that is when most former state-owned companies were going through the shock of their restructuring.

Some of them managed to adapt to the new economic conditions, while other failed. The economic and the political situation in the Balkans was also unfavorable in that period, which also affected the economic development of the country.

See also: Economic Growth More Likely in Bulgaria Than Recession - Experts