Bulgaria Lacks Competitiveness in Lost Decade, Capital Says

By Agnes Lovasz

Bloomberg Agency

Bulgaria needs wages and prices to fall further to increase competitiveness and help economic output return to pre-crisis levels, Capital Economics Ltd. said.

Bulgaria's fixed exchange rate has left the lev about 10% overvalued when adjusted for inflation, stifling exports, Neil Shearing and Lisa Ermolenko, economists at London-based Capital, wrote today in an e-mailed note. Gross domestic product is 5% below its 2008 peak and will only reach that level again in 2015, they said.

"The lack of competitiveness means growth is likely to remain extremely weak for years to come," Capital wrote.

"By the time Bulgaria's output returns to its pre-crisis peak, the economy may have lost close to a decade of growth."

Bulgaria's economy has struggled because of ties to the euro region's weakest economies, with Greece and Italy buying a fifth of exports and controlling about half of banking assets. Even amid a freeze on public-sector wages, nominal gross wages have risen 50% since 2008, while prices have advanced 15%, according to Shearing and Ermolenko.

While the the poorest European Union member grew more than 6% a year before 2008, it will stagnate this year before returning to 2% to 3% expansion, Capital forecasts.

To boost growth rates to 3% to 4% during the next decade, the government must attract investment by cutting bureaucracy and corruption, it said.

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