Quarterly revision of the macroeconomic projections

1. Quarterly revision of the macroeconomic projections Dimitar Bogov Governor January, 2013

2. CONTENTS • Macroeconomic projections for 2013 -2014 • External assumptions • Main macroeconomic scenario for 2013 -2014 • Comparison with the previous projection

3. Macroeconomic projections for 2013-2014External environment • In the period between the two projections: • Minor deterioration of the global economic prospects... • ...in presence of further monetary stimulus, provided by ECB and FED... • ...expectations for negative GDP changein the Euro area in 2013 and slight recovery in 2014.

4. Foreign demand • More evident decrease in the foreign effective demand in 2013 relative to the previous projection, as well as expectations for more moderate recovery in 2014

5. Foreign effective inflation • In the last quarter of 2012, the foreign effective inflation substantially beyond the expectations • Upward revision for 2013 and moderate downward correction for 2014 • Significant dynamics acceleration in 2013 and deceleration of the foreign prices growth in 2014

6. World prices of the basic products • Downward revision of the global commodities’ prices for 2013, but upward revision for 2014 compared to the October projection • The metal prices, after their drop in 2012, are expected to stagnate in 2013 and increase slightly in 2014 • After the increase in 2012, the oil prices are expected to decrease in 2013 and 2014 • After the increase in the corn and wheat prices in 2012, the price of wheat is expected to mount in 2013 and 2014, whereas the price of corn, which is expected to decline.

7. Foreign interest rate • The foreign interest rate continued to decrease, in conditions of recession delay and steadiness of the ECB key rate in July • Downward revision compared to the previous projection • Expectations for moderate increase in 2013 and 2014

8. Macroeconomic projections for 2013-2014GDP • Materialization of part of the risks for deterioration of the global economic environment • Almost unchanged perceptions of the labor market and foreign investments, but expectations for smaller credit activity • Maintenance of the assessment for economic stagnation in 2012 anddownward revision of the GDP projection for 2013 и 2014 • Gradual recovery in 2013 and 2014 • expectations for positive effects of the structural changes on the exports • expectations for solid domestic demand growth • Covering of the negative output gap in the second half of 2014

9. Macroeconomic projections for 2013-2014GDP components • Strong increase in the exportsin 2013 and 2014, with expectations for continuous recovery of the foreign demand and world metal prices and positive effect of the activities of the new facilities on the export potential • Largerimportpressures by export and domestic demand in 2013, especially in 2014 • Increase in the domestic demandin 2013 and moderate growth intensification in 2014, underpinned by the announced direct and public investments and favorable developments with the labor market

10. Macroeconomic projections for 2013 -2014balance of payments’ current account • After the increase in the net inflows from private transfers in 2012, nominal stagnation in 2013, and decrease in their share in GDP, given moderate nominal growth in 2014, is expected • After the increase in the trade deficit in 2012 (mainly as a result of one-time factors), similar level also for 2013 and its increase in 2014, is expected • Slight movement of the current account deficit in 2012 and gradual widening of the deficit in 2013 and 2014

11. Macroeconomic projections for 2013 -2014capital inflows • Lower net inflows in the capital and financial account in 2012 compared to 2011, given lower foreign indebtedness and lower foreign direct investments • Stable capital inflows in 2013 and their increase in 2014, as a result of the expectations for higher direct investments and larger foreign borrowing of the Government • Significant increase in the foreign reserves in 2012 (Euro 124 million) and assessments for further increase in the following two years, thus expecting maintenance of the foreign reserves on adequate level

12. Macroeconomic projection for 2013 -2014inflation • Downward revision of the projected inflation for 2013 (from 3.5% to 3.2%) and assessment for its stabilization in 2014 (2.3%) on the level close to the historical average • Absence of demand pressures – negative production gap until the middle of 2014 • Downward pressures of the oil prices in the current and in the following year • The world food prices, due to the factors on the supply side, still upwards in the first half of 2013 and exhaustion of their inflationary pressure in 2014 • Expected increase in the regulated prices in the domestic economy in 2013

13. Macroeconomic projectionsfor 2013-2014credit growth • The credit growth in 2012 equaled 5.4% (lower than expected), and in the following two years its moderate acceleration is expected, given further deposit growth and available foreign sources of financing • However,the uncertain global environment, the banks’ risk perceptions and the business strategies of the European banking groups that are also present on the domestic market, can produce larger caution of the domestic banking sector about the credit policy • The banking system remains to register high capital adequacy ratio (17.1%), high liquidity and moderate increase in the non-performing loans (10.6%) in the third quarter of 2012

14. Comparison with the previous projection

15. Summary • Economic stagnation in 2012 and moderate increase in the following two years, given expected new private and public investments; • Lower inflation rate in 2013 and more substantial deceleration in 2014; • The capital inflows in 2013 and 2014 are expected to be sufficient for covering the current account deficit and additional accumulation of foreign reserves; • It is estimated that the foreign reserves on a medium-run will maintain on adequate level, reflecting the capability of the economy to mop-up the potential negative shocks; • Further risks of the scenario regarding the changes and the uncertainty in the external environment, imposing a need of further regular monitoring of the macroeconomic developments, and if needed, reaction by taking adequate measures.