"Bulgaria Business Forecast Report Q1 2014" is now available at Fast Market Research

The country's political situation will remain precarious for the foreseeable future given the weak state of the current government and ongoing popular protests. As a result, we do not rule out a return to elections at some point in late 2013 or 2014.

We believe that the incipient recovery in early 2013 will be choked off by recent political events, which will dampen consumption and investment. Bulgaria now looks highly unlikely to record any significant improvement in growth readings this year or next, and we do not rule out another recession.

Major Forecast Changes

The prospect of weaker domestic demand has prompted us to revise our current account forecast, which we now project to record a surplus of 0.4% and 0.7% of GDP in 2013 and 2014, from our previous forecasts of deficits of 0.3% and 1.2%. We forecast a return to deficit over the medium-to-long term, as we believe the currency board arrangement will serve to cap Bulgaria's export competitiveness.

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Key Risks To Outlook

While the domestic risks to growth have increased over the past few months, Bulgaria remains heavily exposed to further deterioration in periphery eurozone economies, given its trade and financial linkages with Greece and Italy. Although this risk is somewhat mitigated by the ECB's pledge to do all it can to save the single currency, in the event of another blow up in the eurozone sovereign debt crisis, we would be forced to revisit our forecasts for Bulgaria across the board.

Although not our core scenario, the current deflationary trend could dampen the outlook for consumption and investment in coming quarters if it persists for longer than we anticipate. This risk is especially relevant given a lack of traditional monetary policy tools to influence price pressures.

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