Bulgaria's GDP fell by 5% in 2009 and recorded its steepest decline in the last quarter of 2009. However, the first months of 2010 already indicate nascent signs of recovery, according to Forton's Bulgarian Economic review for the first quarter of 2010.

Bulgaria is still one of the few countries from Central & Eastern Europe yet to show an improvement in GDP growth. The major reasons for the late recovery are the fixed exchange rate, tight fiscal policy and the unfavorable structure of exports and FDI. Nevertheless, the first two months of the year indicate tentative signs of recovery mainly stemming from increased exports. Thus, the economic forecasts have been significantly improved. The IMF increased its forecast for GDP growth rate in 2010 from decline of 2.5% to increase of 0.2%. The government is also expected to raise its forecast from 0.3% to 1% GDP growth rate for 2010.

The positive side of the otherwise deteriorating economic conditions is the decrease of external imbalances. Bulgaria has to change its growth pattern if it is to resume its economic development on a sustainable basis. The economy has to partially shift its focus from domestic demand to higher value-added export industries. It is clear which industries are already shrinking but unfortunately it is not that obvious which sectors will become the new engines of growth.

In the period January - February 2010, the current account deficit was 82% lower than the deficit in the same period in 2009. It amounted to 155 million euro (0.5% of GDP) compared to 865 million euro (2.6% of GDP) for the period January - February in 2009. The decrease in trade balance (by 350 million euro) was the main factor behind the decline in the current account. Exports amounted to 1.9 billion euro for the first two months of 2010 against 1.7 billion euro for the same period in 2009.

Imports amounted to 2 billion euro compared to 2.4 billion euro in January - February 2009. Thus, the trade deficit was 311 million euro (0.9% of GDP) for the reporting period against 694 million euro (2% of GDP) for the same period last year.

Bulgaria's structure of imports and exports reveals a lot about its economy. The country's export mix is skewed towards low value-added and labor intensive sectors. That is why, approximately 43% of national exports are raw materials in 2009. Bulgaria also imports a lot raw materials and fuels since it is a resource-poor country. However, it imports much more investment goods than it exports them.

Bulgaria trades predominantly with its EU partners. However, compared to its CEE peers it is relatively less dependent on trade with Western Europe and more dependent on trade with its Balkan neighbors. Since most Balkan countries are behind the curve of economic recovery elsewhere in Europe, Bulgaria will slightly lag behind the CEE counties.

FDI in the first two months of 2010 almost evaporated and amounted to just euro 28 million against 555 million euro for the same period in 2009. These figures are preliminary and usually revised significantly upward. Foreign direct investments decreased by 52% in 2009 in line with the effects of the global economic crisis. Real estate and construction were among the most overheated sectors and experienced the largest decline in FDI. Real estate attracted euro 653 million in 2009 against almost euro 2 billion in 2009.

Bulgaria's balance of payments has experienced a significant deterioration since Q4 2008 in terms of the overall balance. However, the current account deficit decreased significantly mainly due to the larger decrease of imports than the decline in exports. It declined from the worrying 24% of GDP in 2008 to a more sensible level of 9.4% of GDP in 2009. The often stated ratio of FDI over current account balance may lead to the wrong conclusion that FDI must cover the current account if the balance of payments is to be positive.

As of February 2010, the capital and financial accounts deficit amounted to 982 million euro against almost 297 million euro in February 2009. A major reason behind the stark decrease of the financial account is the decrease of minimum reserve requirements by the Bulgarian National Bank, which allowed substantial repayment of obligations by Bulgaria's banks to their European counterparts as well as the lower foreign direct investments. Up to February 2010, the overall balance of payments is - 850 million euro against negative balance of 886 million euro in February 2009. Thus, Bulgaria's foreign exchange reserves declined by the same amount.

Bulgaria has a favorable fiscal policy including flat corporate tax rate of 10% (equal to the lowest level in Europe) and it is 0% for regions with high unemployment.

promotion measures are also the VAT exemptions on equipment imports for investment projects over EUR 5 million, the right of acquisition of land and property through a Bulgarian registered company with up to 100% foreign ownership, as well as treaties for avoidance of double taxation with 61 countries.

Since October 2008, the overall business climate has been generally deteriorating. The total business climate in March 2010 decreased by 0.9% in comparison to the business climate in the previous month. It deteriorated in all sectors with the exception of the service sector. The decline in the industrial sector is 1.6% but managers are slightly more optimistic for the next six months.

The business climate in construction decreased by just 0.4%, while the retail sector registered the steepest decline of 3.2%. The only sector that registered improvement in sentiment was the service sector with increase of 2.2%. Managers in this sector have more optimistic expectations for the next three months and even predict increase in employment.

After years of high inflation due to the booming economy and credit expansion, inflation precipitously fell to just 0.6% in 2009 as a direct result of the sharp contraction of economic activity. The accumulated inflation for the first three months of 2010 was 1.4%.

The unemployment rate rose sharply in 2009 and reached the level of unemployment in 2006 of 9.1%. It continued to increase rapidly in 2010 and reached 10.3% in February. However, it fell to 10.1% in March. As of February 2010, the unemployment rate in both the Eurozone and the EU is 10.

The employment rate is equally important but often overlooked indicator. It is the ratio of employed people over the working - age population. As of Q4 2009, the employment rate (ages 15 - 64) in Bulgaria is 61.2% against 64.3% in Q4 2008.

Both retail sales and private consumption plummeted by 8.8% and 6.2% respectively in 2009.

Restricted credit conditions, rising unemployment as well as general consumer cautiousness all contribute to the subdued demand.

Bulgaria's budget deficit for 2009 was revised from 1.8% to 3.9%. The new government uncovered annexes that require more than one billion Euros of additional expenditures.

Nevertheless, Bulgaria remains one of the countries with the lowest budget deficit in the EU. The consolidated budget cash deficit for the first two months of 2010 amounted to almost 715 million euro due to lower revenues, higher social security expenditures and belated payments to businesses.

Bulgaria has experienced steady decrease in its external public debt since 2002 in accordance with the prudent fiscal policy required under the currency board arrangement. Thus, it enjoys one of the lowest public debt to GDP ratios in the EU. However, the private external debt increased dramatically as the Bulgarian economy became more dependent on foreign financing to sustain its GDP growth rate. The short - term external debt has also been increasing until 2008 but dropped to 35.5% of GDP in February 2010.

The housing sector deteriorated in line with the worsening state of the Bulgarian economy since it is a huge sector and its condition is directly influenced by the state of the economy. In Q1 2010, home prices declined by 2.3% compared to Q4 2009. The cumulative decline in home prices since Q4 2008 is 31%.