BULGARIAN ECONOMY - OPPORTUNITIES AND PERSPECTIVES PLAMEN ORESHARSKI MINISTER OF FINANCE Sofia 18 June 2008

2007 – ECONOMIC INDICATORS High and sustainable economic growth of around 6% Adequate budget balance and falling government debt Inflation - influenced by external and internal shocks Lowering unemployment and rising economic activity of the labor force FDI cover the current account deficit Stable and sustainably high economic growth Higher than EU average growth Substantial rising of international oil and food prices Unfavorable weather conditions and results in the agricultural sector Convergence process of price and income levels Changes in administrative prices Weakening impact of the rising of excise duty rates Stable economic growth – continuous rising of employment and falling of unemployment rate Employment rose by 4.6% as a result of new jobs creation in the private sector and enhanced economic activity Unemployment dropped strongly to 6.9% on the average for 2007. Unemployment is stably dropping from around 19% in 2001 to around 6.9% in 2007 – comparable to and even lower than the EU-25 average levels. In 2007 the labor productivity growth in the Bulgarian economy accelerated to 3.3% in real terms compared to 2006. The income of the population also continued to rise – the average salary in 2007 rose by 19.7 and 10.4% in nominal and real terms respectively compared to 2006 For the period 2000 – 2007 there is consistency between income growth and labor productivity growth Despite the increased labor costs in 2007 the share of employed compensation lags considerably behind this indicator for EU-25 which allows competitiveness to be preserved. In 2007 the current account deficit reached 21.5% of GDP FDI cover 98% of the deficit according to preliminary data The foreign currency reserves continue to grow sustainably Sustainability of the current account Macroeconomic stability High economic growth Accelerated investment activity Enhancing foreign trade openness High degree of capital openness Stable financial system Favorable foreign debt structure FX reserves covering 6-month import of goods and services Main objectives of the fiscal policy: to help maintain the economic stability and sustainable economic growth Meets the rules of the Stability and Growth Pact budget balance within the Maastricht criteria, while maintaining budget surpluses avoiding any pro-cyclic policy The prudent fiscal policy ensured smooth reduction of government debt Considerably lower service costs The fiscal reserve ensures good coverage of the government debt Maintaining budget surpluses and high economic growth will help keep the government debt as a percentage of GDP well below the Maastricht criterion Widening current account deficit as a result of accelerated investment growth, which is ahead of the savings growth. Fundamental: High return on domestic investment Substantial FDI growth Growing domestic demand, investment in particular Positive expectations for future income Of a temporary nature : Liberalization of trade in garments in 2005 The floods in 2005 and the drought in 2007 Slow down of production and exports as a result of the restructuring of certain sectors

Source: NSI, AEAF, Eurostat ECONOMIC GROWTH Source: NSI, AEAF, Eurostat Stable and sustainably high economic growth Higher than EU average growth

GOVERNMENT BUDGET AND DEBT Main objectives of the fiscal policy Adequately addresses the imbalances in the economy Meets the rules of the Stability and Growth Pact Considerable reduction of government debt Main objectives of the fiscal policy: to help maintain the economic stability and sustainable economic growth Meets the rules of the Stability and Growth Pact budget balance within the Maastricht criteria, while maintaining budget surpluses avoiding any pro-cyclic policy The prudent fiscal policy ensured smooth reduction of government debt Considerably lower service costs The fiscal reserve ensures good coverage of the government debt Maintaining budget surpluses and high economic growth will help keep the government debt as a percentage of GDP well below the Maastricht criterion Source: MoF

INFLATION Substantial rising of international oil and food prices Source: MoF Substantial rising of international oil and food prices Unfavorable weather conditions and results in the agricultural sector Convergence process of price and income levels Changes in administrative prices Weakening impact of the rising of excise duty rates

LABOR MARKET Stable economic growth Employment rose by 4.6% UNEMPLOYMENT (%) EMPLOYMENT Stable economic growth – continuous rising of employment and falling of unemployment rate Employment rose by 4.6% as a result of new jobs creation in the private sector and enhanced economic activity Unemployment dropped strongly to 6.9% on the average for 2007. Unemployment is stably dropping from around 19% in 2001 to around 6.9% in 2007 – comparable to and even lower than the EU-25 average levels. Source: NSI Stable economic growth Employment rose by 4.6% Unemployment dropped strongly to 6.9%.

CURRENT ACCOUNT DEFICIT AND FDI Sustainability of the current account Macroeconomic stability High economic growth Accelerated investment activity Enhancing foreign trade openness High degree of capital openness Stable financial system Favorable foreign debt structure FX reserves covering 6-month import of goods and services Widening current account deficit as a result of accelerated investment growth, which is ahead of the savings growth. Fundamental: High return on domestic investment Substantial FDI growth Growing domestic demand, investment in particular Positive expectations for future income Of a temporary nature : Liberalization of trade in garments in 2005 The floods in 2005 and the drought in 2007 Slow down of production and exports as a result of the restructuring of certain sectors Source: BNB, AEAF In 2007 the current account deficit reached 21.5% of GDP FDI cover 98% of the deficit according to preliminary data The foreign currency reserves continue to grow sustainably

INCENTIVES TO INVEST IN BULGARIA Favorable business climate Favorable tax environment Equal tax treatment of local and foreign investors Investment credit rating Good technical skills of labor force Comparatively low operational costs Support for the building of infrastructure to large investment projects Consistent efforts to improve the business environment 10% tax on profit – the lowest in Europe Flat personal income tax rate of 10% Simplified procedures for tax payment and tax refund Lowering employers’ costs on social security contributions Constantly improving business climate – the index level has almost doubled in the past two years Record-breaking level of industrial production capacity use – 75% at the end of 2007 The share of companies not encountering any difficulties in their development is increasing in all sectors Rising domestic and foreign demand for locally produced goods and services Liberalization of procedures for starting-up and doing business Launch of an e-Company Register as from 1 January 2008 One-stop shop services Adoption and implementation of a Better Regulation Program Adoption of the national objective for reduction of the administrative burden – by end-September 2008

FINANCIAL SYSTEM Adequate increase in FX reserves High level of credit activities with good quality of Commercial Banks’ portfolios Sustainable growth of deposit base Greater role of non-banking financial institutions High degree of coordination of policies ensuring Effective regulation of the financial system Sustainably high growth of FX reserves (33.7% annual growth in 2007) supported by Significant FDI and great inflows of financial resources Well-regulated fiscal policy and growth of the fiscal reserve Higher minimum required reserves of CB at the BNB Despite the negative influence of some external factors, BNB FX reserves ensure high level of coverage of monetary base and supply Implementation of a strict regulation of the banking sector in line with the Basel II requirements Conservative policy with regard to the minimum required reserves of commercial banks Consistent amendments to the legislative framework in accordance with best practices and acquis communautaire Provision of legislative environment for stable operation and ensuring the security of accumulated financial resources Improvement of market information transparency standards Liberalization of the investment regime of non-banking financial institutions Adoption of a new Markets of Financial Instruments Act to regulate trade by taking into account the country’s joining the European Single Market and expanding the base of financial instruments subject to regulation

INCREASE IN FX RESERVES Sustainably high growth of FX reserves High level of coverage of monetary base and supply Sustainably high growth of FX reserves (33.7% annual growth in 2007) supported by Significant FDI and great inflows of financial resources Well-regulated fiscal policy and growth of the fiscal reserve Higher minimum required reserves of CB at the BNB Despite the negative influence of some external factors, BNB FX reserves ensure high level of coverage of monetary base and supply Source: BNB, AEAF

CREDIT ACTIVITY OF BANKS Household Credits Corporate Credits Source: BNB, AEAF Source: BNB, AEAF Increase of credits for the private sector Retention of good quality of credit portfolio Pressure on interest rates due to great competition in the banking sector

ECONOMIC POLICY... Maintenance of the Currency Board Arrangement with the current rate of exchange 1 EUR = 1.95583 BGN until the country joins the Euro area Maintenance of rigid fiscal discipline More active labor supply, better labor market flexibility Public sector wage growth will not be ahead of labor productivity Coordination between the Government and the Central Bank when making commitments concerning the medium-term economic policy Careful monitoring of risks in the economy and timely reaction, where needed

... AND PROSPECTS FOR DEVELOPMENT Maintenance of a sustainable and high growth Increase of capital in the economy resulting from internal investment demand, sustainable inflows of FDI and absorption of EU funds Sustainable low level of unemployment and gradual increase of employment and economic activity Stable increase in real income and well-being Deepening of financial intermediation while preserving the system’s stability Price increase due to the process of convergence towards leading economies

PLAMEN ORESHARSKI MINISTER OF FINANCE THANK YOU! PLAMEN ORESHARSKI MINISTER OF FINANCE