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Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 07Aug 08Aug 09Aug 10Aug 11COUNTRY REPORT: BulgariaOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) BBB Positive Baa2 Stable0.18% 3.65% 4.82% 5.43%Economy and Market OutlookEconomic activity continues to perform well, albeit at a slower pace, with a recovery in domesticdemand and gross capital formation on a firm footing. Strong export growth remains a key drivingforce behind the economic expansion; nonetheless, the pace has been eroded to some degree byelevated inflation, 4.1% y/y as of August, and an underperforming job market. Second quarter grossdomestic product advanced 2% q/q annualised, as compared to 3.3% in Q1 11, mirroring the globaleconomic slowdown. Going forward, the growth forecast for 2012 was as expected revisited downfrom 5% to a range of 3-4%, underpinning the uncertainties surrounding a potential downturn ineconomic activity in the Eurozone, Bulgaria‟s main trading partner, as some 60% of the country‟sexports are distributed across the common market. On a positive note, the robust recovery of GDP,sharp improvement on the current account balance sheet, a declining external debt ratio and prudentfiscal consolidation have significantly reduced the risk to macroeconomic and financial stability, whichresulted in an one-notch upgrade by Moody‟s of the country‟s long term local currency debt. Thegrade was raised to Baa2, the second lowest investment grade, form Baa3 with a stable outlook,which places Bulgaria on par with e.g. Brazil and Kazakhstan, and one step higher than Hungary orRomania. Bulgaria, the poorest of the European Union members, has cut fiscal spending in additionto an increased tax collection and is therefore set to close the 2011 fiscal year with a budget shortfallof 2.5% and targeted budget deficit of a mere 0.4% by 2014, which coupled with a low public debt anda widely spreading sovereign debt crisis in Europe, positions the country‟s fiscal stance favourablyrelative to its Eastern European peers going forward.1.97EUR/BGN 1 month forwardEUR/BGN20CPI y/y %1.9715101.9651.9601.95-52010 2011 (f) 2012 (f)Real Growth (%) 0.2 2.9 3.4CPI (%)* 2.2 4.2 3.3Current account (% GDP) -1.4 -3.0 -3.5Fiscal balance (% GDP) -3.9 -2.5 -2.2Government Debt (% GDP) 17.4 17.8 20.5Daily volumesSpot FXUSD1.3bnFX Reserves 15.40*End of YearSource: IMF, S&P, Bloomberg, BarclaysPoliticsPresident: Georgi ParvanovPrime Minister: Boiko BorisovOn July 26, the minority government ruledby Boiko Borisov, survived the third attemptof a non-confidence vote, as GERB, theruling party, failed to secure the EuropeanUnion approval to join the passport-freeSchengen zone. According to the EuropeanCommission, rampant corruption and heavypresence of organised crime were the keypoints of concern behind the refusal of thecountry's accession to the Schengen Zone.29Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.