Bulgaria: The three scenarios for the economic impact of COVID-19

Bulgaria: The three scenarios for the economic impact of COVID-19

The Institute for Economic Research of the Bulgarian Academy of Sciences presented three scenarios for the macroeconomic consequences in Bulgaria from the COVID-19 pandemic, the academy said. The rapid analysis was based on information about the spread of the infection and the government measures in place until April 12 this year, with scientists updating their predictions whenever new and significant changes occur.

The first scenario presents the peak of the COVID-19 epidemic in Bulgaria in mid-May, there is no second wave of cases, the measures are gradually abolished and during the second half of the year the economy operates normally. The probability of this scenario happening is according to the Institute is 20%, resulting in a decrease in GDP by 2.4% and a slight increase in inflation compared to 2019. The volume of foreign trade will be significantly reduced in imports, with a worsening of current account balance, mainly due to the low tourist season, which is projected to be reduced by 20%.

The labor market will be moderately affected, with unemployment rising to 6.9%. Instead of a balanced budget, there will be a 1.5% deficit in GDP, which will be covered by the issuance of a new 2.5 billion leva bond. Fiscal and foreign exchange reserves will remain at about the same level, with public debt accounting for 21.7% of GDP.

The second scenario envisions a peak in late June and mid-July, with the gradual withdrawal of the measures and the possible re-introduction of certain restrictions. The probability of this happening is 60% according to the analysis. Economists predict a 4.3% drop in GDP and an acceleration of inflation to 4.2% on an annual basis. The volume of foreign trade will decrease significantly and the deterioration of the current trade balance will exceed 1 billion euro, mainly due to the decrease in exports by 4.6% and the decrease in the tourist season by about 50%.

The labor market will face negative effects, with unemployment doubling compared to 2019 to 10% of the workforce. Budget revenues will be lower than projected by 9%, while expenditures will remain within the budget provided by the state budget law. However, there will be a shift towards health and social welfare at the expense of capital expenditures. The budget deficit will reach 2.5% of GDP and will be covered by the issuance of a new 3.8 billion leva bond. Foreign exchange reserves will decline by about 500 mln euro and public debt will rise to 23% of GDP.

The third scenario predicts the peak of the disease in mid-August with periodic tightening and relaxation of measures. The probability of this scenario happening is 20% and the real GDP drop will be 5.7%. Inflation will rise to 5.2% on an annual basis and the reasons will be the problems with the supply of some imported basic goods. The compensatory factor for higher inflation will reduce consumption and reduce energy costs. There will be a significant reduction in the volume of foreign trade and deterioration of the current account balance by more than 2 billion euro, mainly due to the greatly affected summer tourist season, which will fall between 50 and 70%.

The labor market will suffer a strong negative shock, with unemployment reaching almost 350,000 people or 12% of the workforce. Budget revenues will be lower than projected by almost 10% and expenditures to support various vulnerable groups, healthcare or business programs will increase by 5.5% compared to those provided before the update. There will also be a redistribution of costs, reducing capital to the detriment of current ones. The budget deficit will reach 5% of GDP and will be covered by the issuance of a new 8 billion leva bond. Foreign exchange reserves will fall by about 1 billion euro and public debt will rise to 26.5% of GDP.

In addition to the three scenarios, the analysis also evaluates the measures taken so far in terms of the speed, depth and scope of their implementation. According to the Institute’s economists, the restructuring of the budget, as well as other economic measures, were taken in a timely manner. Although the announced economic packages in some of the leading countries are 10 or more percent of their GDP, in Bulgaria the fiscal measures are about 2%, which fully correspond to the country’s capabilities and will certainly undergo changes during the crisis, the institute emphasizes. Also, the possibility of a new restructuring of the budget in the case of the second or third scenario is not ruled out.

The decision to increase the maximum amount of new government debt to 10 billion leva was also positively assessed, although it is unlikely that the budget deficit and the borrowing that will be needed will reach these levels. The measures taken by the Bank of Bulgaria are also sufficient, given the restrictions of the monetary council and, as the crisis worsens, changes in the minimum required reserves can be taken into account, economists say.

With regard to the scope of the measures taken, the postponement of the corporate tax is considered a broad and universal tool, because it applies to the entire business sector. At the same time, there are those measures that target some vulnerable groups with an approximate scope of application – for example, care for food and medicine for adults and people with disabilities, food for the poor and certain amounts for single mothers and others.

As for the 60:40 measure in favor of employment, economists believe that the state can become bolder, receiving only 60% of wages, without the need for companies to participate in maintaining workers’ incomes.

In conclusion, economists at the Bulgarian Academy of Sciences’ Institute for Economic Research point out that the best measures to combat COVID-19 are to deliberately reduce economic activity and reduce the number of infected people. The problem with this approach is that immunity of the population is delayed over time, but depending on the course of the epidemic, cyclical imposition or lifting of restrictions could be considered. Scientists say it will take 6 to 12 months to deal with the infection permanently, and this period can only be shortened if there is a proven drug treatment, given that the vaccine is not expected to be ready for at least another year./ibna