1. Annex 2

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

3. 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

4. Investment-driven growth

5. We need such kind of growth to increase productivity and competitiveness

6. 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

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

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

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

10. Banking system efficiency on the rise Decreasing risk premium

11. 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

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