Annex 2

Economic performance Since 1998, real GDP growth has been robust despite external shocks

Investment-driven growth Bulgaria needs investments to rebuild economy Bulgaria needs investments to increase productivity and to compete with other countries on foreign markets Bulgaria still has low level of investment as a share of GDP

Investment-driven growth

We need such kind of growth to increase productivity and competitiveness

Investment-driven growth obstacles We have very low level of domestic savings The banking system is still weak after the crisis Our investment horizon is still short Institutional and enforcement issues impede the investment process

Low level of domestic savings As a result we had CA deficit in the post- crisis period

Current account deficit financing FDI covers the CA deficit FDI, % of current account deficit

Banking system is still weak Banking system is weak but improving Increasing degree of monetisation of Bulgarian economy

Banking system efficiency on the rise Decreasing risk premium

Short-run risks for Bulgarian economy Lower growth rates of the world economy Higher oil prices due to war in Iraq Appreciation of the lev against the dollar and worsening of the trade balance Higher foreign interest rates

Buffers available to cushion the risks High level of foreign reserves Buffers built in the 2003 budget Expected privatization revenues Sound banking system