In spite of the relative slowdown in the third quarter, Bulgaria's economy will live true to the forecasts of a GDP growth of about 2% in 2011, according to the monthly macroeconomic report of Raiffeisenbank Bulgaria.

Domestic consumption is replacing exports as the primary engine of growth but its dynamic remains uncertain with respect to the development of outside factors and their potential effects on demand in Bulgaria, the bank economists have concluded.

Raiffeisenbank points out that Bulgaria's unemployment rate dropped down to 10.2% in the third quarter of 2011 primarily thanks to the seasonal employment in tourism and agriculture, but that is still higher than it was in Q3 2010, year-on-year.

Bulgaria's monthly inflation in October grew by 0.8% compared with September, reflecting the fall price increases on food and clothing.

At the same time, Bulgaria's fiscal positions remain sustainable, with the budget deficit amounting to 1.1% of the GDP, growing by only BGN 16 M in October, the bank notes.

Bulgaria's currency board is evaluated as stable, with the currency reserve rate being the highest in the past 35 months, covering 183.3% of the monetary base.

"A potential repetition of the euro zone recession will affect the Bulgarian economy because Bulgaria is highly integrated with this group of countries with respect to its foreign trade and financial system," explained Kaloyan Ganev, Chief Economist of Raiffeisenbank Bulgaria.

"On the one hand the demand for Bulgarian exports will decline, and this is already visible from the data. On the other hand, the sources of foreign funding are becoming less accessible. This will reduce the growth of crediting, consumption, and investment, which is why we are reducing once again our economic forecast for Bulgaria from 2% to 1.2% growth in 2012," he elaborated.

Ganev stressed that even though the bank's projected 2012 economic growth for Bulgaria is low, it remains positive.

"EU funding will have a crucial contribution in that respect. Our forecast is also based on better fiscal and banking system indicators compared with most of the countries in the rest of Europe," he said.

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