PLANECON QUARTERLY REPORT
Quarterly report, August 22, 2001

BULGARIA - NEW GOVERNMENT TAKES REINS WITH A SOLID BASIS FOR GROWTH IN PLACE.

• Bulgarian GDP increased an impressive 6.5% in the fourth quarter of 2000. GDP growth in the first quarter of this year was a more modest 4.5% as consumer demand fell off slightly and export demand growth slowed. GDP growth is projected to accelerate in the last quarters of 2001 as demand by Bulgarian consumers picks up. Retail trade results indicate that consumer expenditures strengthened considerably in April and May 2001.

• Bulgarian industrial sales were up a solid 5.1% in the first five months of 2001. Sales for export increased 5% for the period while sales to the domestic market rose 4.4% in contrast to developments last year. In 2000, while sales by industry for export surged, sales on the domestic market declined. Increases in value added in industry continued to significantly outpace gross indicators for the sector as unprofitable lines of activity were wound down. While gross industrial output increased only 2.5% in the first quarter of 2001, value added in industry increased 11.6%.

• Exports in January-April 2001 grew 12.3% while imports nearly kept pace with an increase of 11.9%. The payments-based deficit in the first four months amounted to $386.7 million compared with $350.4 million one year earlier. Bulgaria's current account deficit in the first four months of 2001 improved substantially to $237 million compared with $383 million in the same period a year earlier despite the modest deterioration on the merchandise trade account. The wider trade gap was more than offset by strong improvement in net earnings on trade in services and net current transfers.

• A new government is being formed following the resounding victory of the Simeon II National Movement in the June parliamentary election. The movement, put together by Bulgaria's exiled former king, was registered only two months prior to the election, but garnered one-half the seats in parliament. A coalition government with at least one partner (probably the ethnic Turkish party) is likely. The economic policy team of the king's movement has pledged to accelerate and complete privatization and reform and strongly supports joining the European Union and NATO. The details of the new government's likely economic program are still to be filled in, however.

• KEY MACROECONOMIC TRENDS

KEY MACROECONOMIC TRENDS

National account statistics for the first quarter of Recently released preliminary data on develop- 2001 were published in the first week of July, ments in Bulgarian GDP in the first quarter of While the 2000 result was even better than most 2001 indicate that year-on-year growth took had anticipated (up 5.8%), GDP growth in the first place at the same rate as in the first quarter of quarter of this year (an increase of 4.5%) was last year, but slowed compared with GDP slower than in the preceding three quarters (5.5%, growth rates in the last three quarters of 2000. 5.6%, and 6.5%, respectively). Consumer demand weakened in the first three months of this year, although gross investment On the sector of origin side, growth in value in fixed capital rose strongly and increases in added by industry was the driver behind the in- inventories accounted for 2.7% of GDP. In the crease in GDP both in full year 2000 and in the first quarter of last year, destocking was taking first quarter of this year, despite quite modest place. Growth in exports of goods and services gains in gross indicators of industrial activity. was substantial but well below the heady rates Value added in industry increased 11.6% in the recorded in the early months of 2000. first quarter compared with a 24.6% increase in the preceding quarter and growth of 15.3% in full-The National Statistical Institute released preliminary 2000. Value added in agriculture continued nary data on developments in GDP for the fourth to contract, down 14.8% in the first three months of this year as the impact of the poor harvest in 2000 cast its shadow forward. The agricultural sector, however, typically records only a small share of annual value added in the first quarter (12.8% in 2000). Value added in the service sectors increased 3.6% year-on-year in the first quarter of 2001. The share of the private sector in generating value added continued to increase, reaching 66.2% in the first quarter of this year compared with 62.1 % a year earlier.

Table 1-Aggregate Output and Demand

	Percent Change Q142000/ Ql-41999	Percent Change Q12001/ Q12000
Gross Value Added	6.7	4.4
in agriculture	-10.1	-14.8
in industry	15.3	11.6
in services	7.8	3.6
Adjustment	- 0.6	5.3
GDP	5.8	4.5
Final Consumption	4.5	- 1.5
personal	3.0	- 1.6
government	20.0	- 0.5
Gross fixed investment	8.2	11.9
Exports	24.2	15.9
Imports	14.6	7.4

Consumption declined modestly in the first quarter of this year. Personal consumption slipped 1.6% as unemployment rose and gains in real wages slowed. Personal consumption had increased 6.1% in the final quarter of 2000 as public sector employees received a bonus of a thirteenth month salary made possible by higher than anticipated tax revenues. Government consumption soared 22% in the fourth quarter and 20.0% in the full-year 2000, but declined by 0.5% in the first quarter of this year.

Gross investment in fixed capital, in contrast, remained strong. After increasing 8.2% in 2000, gross fixed investment rose 11.9% in the first three months of this year. This helps to explain the turnaround in industrial sales to the domestic market in that period, especially since imports of capital goods fell slightly.

We project GDP growth to accelerate in the last quarters of this year as consumer expenditures perk up. Retail sales indicators for April and May have been encouraging. While net income from retail trade (including repair of household items) increased only 2.8% year-on-year in the first quarter, this indicator jumped 5.0% in April and 7.2% in May. The statistical series on nominal and real developments in sales turnover with respect to a narrow definition of the retail trade sector is no longer published on a monthly basis.

While a number of important industrial branches reported very substantial increases in the first five months of 2001, the rate of growth in gross indicators of industrial activity was well below the rates of increase that have been recorded in value added in the sector because unprofitable lines of activity have been wound down. Industrial sales increased 5.1% in January-May 2001 while gross industrial output rose only 2.4%. Sales by manufacturing branches increased 5.5% in this period although output increased only 1.3%.

The sharpest increases in industrial activity were registered by the apparel and footwear branches, by several specialized branches of machine-building, and by the chemical industry. Sales in the first five months of 2001 by the radio, tv and telecommunications equipment branch rose 35%, automotive and transport equipment 31%, sewn goods 25%, leather and fur products 17.4%, and chemicals, 14.8%. Sales by the metals industry, which had been strong in 1999-2000, declined 8.5% in the first five months of 2001 as world metals markets weakened. Activity in the extractive industries continued to decline in January-May. Output and sales of coal and peat declined by 13.9%.

Declines in the world market price of energy and better than anticipated supplies of flour and other staple food items led to an improvement on the inflation front in the first half of 2001. Year-on-year consumer price inflation reached 11.4% in December 2000, but the CPI gained only 0.8% in the course of the first six months of this year. Food prices fell 1.3% in January-June 2001 while prices of non-food items increased 2.1% and prices of services rose 3.4%. In June 2001, year-on-year consumer price inflation was 9.5%. We project a further moderate decline in the year-on-