Bulgaria’s government could compensate some of the expected slowdown in economic growth, a negative effect of the British referendum to leave the EU, by increasing public spending and targeting a higher Budget deficit in 2017, the chief economist of Bulgaria’s largest bank UniCredit Bulbank, Kristofor Pavlov, wrote in a research note on July 4.
Pavlov said that the biggest impact from Brexit on Bulgaria would be, predictably, through trade, although not directly, since the United Kingdom only accounted for 2.5 per cent of Bulgarian exports. The indirect impact would be much larger because Bulgaria’s small economy is very open and export-oriented businesses are part of supply chains for much larger Western European companies that do a lot of trade with Britain.
“The trade slowdown will begin to materialise in the final months of this year […] and will strengthen next year, when our baseline scenario envisions growth in Bulgaria’s main foreign trade partner, the euro area, slowing down to one per cent, from 1.6 per cent forecast before Brexit,” Pavlov wrote.
Britain’s decision to leave the EU would also increase uncertainty, which will have an impact on global foreign investment in general, as well as investment in developing markets in Central and Eastern Europe, Bulgaria included. This impact, however, is expected to be more moderate on economic growth, compared to the trade repercussions.
The smallest impact will be from financial channels, mainly because Bulgaria’s economy is resilient to external shocks due to a combination of factors, including strong fiscal parameters, a moderate current account surplus, extensive currency reserves and reduced financing needs, both at sovereign and corporate level.
Overall, UniCredit Bulbank’s forecast is for Bulgaria’s economic growth to slow down by 0.2 percentage points this year and 1.1 percentage points in 2017. But the government can afford to compensate some of that negative impact next year because the economy was in a strong position, with no major macroeconomic imbalances and having made good progress towards fiscal consolidation.
“It is our opinion that compensating measures could be in the form of increased public investment spending, at the expense of increasing the Budget deficit from a forecast 1.8 per cent this year to 2.5 per cent in 2017,” Pavlov wrote. This would reduce the impact of Brexit on Bulgaria’s economy to a slowdown of 0.6 percentage points next year, compared to 1.1 percentage points in the baseline scenario.