Key Macroeconomic Developments in 2011 In 2011 the Bulgarian economy grew in real terms by 1.

7% YoY due mainly to strong net export, with export growth reaching almost 13%. Consumption and investments remained flat to slightly down while public spending decreased. The recovery was more robust in the first half of the year in line with stronger recovery in Bulgarias main export partners. During the second half of 2011 export growth sharply decelerated mirroring the slowdown in Europe.
100.0 50.0 0.0 . Jan-11 Mar-11 May-11 Jul-11 -50.0 Exports, lhs Sep-11 Nov-11 Jan-12 -20.0
Source: Bulgarian National Bank

YoY Growth

20.0

Industrial production, rhs

Growth in retail sales and money in circulation, our indicators for consumption in Bulgaria, have not recovered substantially compared to the pre-crisis level, due to still-high unemployment rate and growing savings. The continually increasing deposit levels indicate that individuals are still in a precautionary saving mode and prefer to save rather than consume. That said, over the Jan-Sept11 period there was some YoY improvement in consumer spending in line with the general stabilization abroad. However, sentiments worsened again in Q4 consistent with the growing risks of default by Greece and expectations for a weaker growth or even recession in the EU.

5%

QoQ Growth

10%

12 7

54 49 44 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Feb'12 39 Deposits from NFIs in BGNbn Unemployment 2% 1%

0% Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 -5% Retail sales Money in circulation

0%

2 -3

-10%

Consumer sentiment
-35.0 -40.0 -45.0 -50.0

Business sentiment, MoM change

0% -1% -2% -3%

Source: Bulgarian National Bank, National Statistic Institute

On the backdrop of the weak GDP growth, the sustained high rate of unemployment indicates that more structural reforms are needed to improve business climate and labor market flexibility. In 2011 the unemployment rate slightly increased and remained stable at 11.2% throughout the entire year. Unlike in 2010, in 2011 the services sector became the main contributor to the decline in employment, while the rate of layoffs in industry somewhat decelerated. In Q3-2011 the number of unemployed increased mainly due to the growth of long-term unemployed
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(above 1 year) whose relative share reached 56% of all unemployed. The unemployment rate is expected to remain elevated.
Individual unemployment 50.0 expectations for the next 12 months 45.0
40.0 35.0 30.0

Source: National Statistical Institute

Labor productivity continued growing, registering an average annual growth of 6.1%, with industry being the main contributor to it with its own labor productivity growth of 12.1%. The real unit labor costs fell by 3.7% in the economy compared to an increase of 2.7% a year earlier . Inflation Inflation decreased over the course of 2011 reaching 2% at the end of the year (3.4% on average for the 12-month period). For 2012 consensus expectations are for a further decline in the average annual inflation to 3%, which is likely to support consumers purchasing power to a certain extent. However, rising energy prices may put this estimate at a risk. Balance of Payments In 2011 the current account turned positive reaching a surplus of EUR 361m1. The current and capital accounts registered a surplus amounting to EUR 855m (2.2% of GDP) compared to a deficit of 0.2% of GDP (EUR 85m) a year earlier. The main contributor to this improvement was the trade deficit, which was reduced to EUR 1.97bn or by EUR 789m in comparison to 2010. Additional contributors to the current account surplus include improvements in the services and transfer accounts. In 2011 the nominal rate of export growth (30%) outran that of imports (21%) and resulted in a trade deficit contraction. The main contributors to export growth were metals, machines, transportation vehicles, equipment, instruments, minerals, fuels, etc. For a second consecutive year exports increased strongly due to the (1) solid external demand and (2) improved economic competitiveness, as indicated by Bulgarias growing market share in the EU and the world. The preliminary balance of payments data indicate that foreign direct investment (FDI) inflows remained positive but weak in 2011. The registered improvement was insignificant: in 2011 FDI reached EUR 1.34bn (3.5% of GDP) vs. EUR 1.2bn (3.4% of GDP) in 2010. The relatively lower net FDI in the last couple of years reflect both the limited amount of FDI inflows and the repayment of inter-enterprise loans by enterprises following their repayment schedules. The highest net inflows were registered in transport, communication and trade, while the highest net outflows were registered in manufacturing. The financial account deficit grew in 2011 to EUR 1.19bn, caused mainly by resident banks transactions. They increased their foreign assets and decreased their foreign liabilities by transferring deposits to parent banks. Households propensity to save and limited consumption together with the confidence in the banking sector contributed to a substantial growth of bank deposits, which allowed banks to both maintain ample liquidity and continue reducing their external debt.

Central Banks Economic Review for Q4 2011

In 2011 Bulgarias gross external debt declined by EUR 1.66bn and registered EUR 35.4bn (91.9% of GDP). Both bank and non-bank sectors managed to decrease their indebtedness. The non-bank sector decreased its inter-enterprise loans by EUR 127.6m. The public and publicly guaranteed external debt also declined by EUR 102m. In 2011 the overall balance of payments registered a small surplus compared to a deficit of EUR 384m in 2010. As a result the BNB international reserves increased by EUR 158.7m in 2011. Banking System In 2011 bank lending remained sluggish, albeit increasing, as gross loans to non-financial institutions /NFI/ grew by 4% YoY (vs. 2% in 2010). The growth was mainly driven by the corporate sector (up 6% YoY) while retail loans remained virtually flat YoY as individuals continued deleveraging. Overall, lending remained weak due to both fragile demand and strict lending conditions. Given the uncertain macro environment,we expect lending to continue to be subdued in 2012 despite relatively high liquidity in the banking system. Similar to 2010, deposits from NFI (both corporate and retail) continued to increase at a solid pace of 12% YoY or BGN 5.5bn in 2011. In addition to building up liquidity, these inflows were used to repay foreign liabilities (down 12% YoY or BGN 2.2bn), primarily deposits from parent banks. At the end of 2011 the Bulgarian banking system accumulated ample liquidity with its coefficient of liquid assets reaching 25.5%.
28 26 24 22 Q4'10 Q1'11 Q2'11 Q3'11 Foreign Liabilities in BGN bn, rhs Liquid assets, % of liabilities, lhs Q4'11
Source: Bulgarian National Bank

18 16 14 12

Importantly, the deleveraging process that banks performed over the last two years resulted in reduction of dependence on parent banks for funding. As of Feb'12 about 12% of banks' total liabilities were from parents compared to almost 25% at the end of 2008. Non-performing loans continued to increase in 2011 reaching nearly 15% of loans to NFI or BGN 8.4bn. Although bad loans' growth rate decelerated in Q4, we expect the credit quality to continue to worsen in 2012 due to the challenging macro environment. Nevertheless, the banking system has accumulated significant buffers as it has a capital adequacy ratio of 17.5% at the end of Dec'11, which could absorb bad loan losses of about BGN 3bn. Fiscal Policy In 2011 the fiscal deficit reached BGN 1.6bn or 2.1% of GDP and Bulgaria became Maastricht compliant in terms of the fiscal criterion. The deficit was lower than that in 2010 (4.5% of GDP) and the projected deficit for 2011 (2.5% of GDP). The YoY improvement stemmed from the stronger decline in expenditure in percent of GDP (down by 2.8pp) as compared to the decline in revenues in percent of GDP (down by only 0.9pp). Total fiscal revenues reached BGN 25.38bn (up 6% YoY and 97% of the budget projections) in 2011. While tax and nontax revenues were in line with estimates, subsidy revenues were only 66% of the budget projections. This was mainly due to lower than expected absorption of EU funds - BGN 1.38bn vs. BGN2.14bn expected. That said, the 2011 transfer is significantly higher compared to 2009 and almost equal to that in 2010. In 2011 expenditure as a percentage of GDP decreased YoY , but increased slightly in absolute terms. During the year there was no substantial reduction in salaries and social security costs which indicates that the Government did not perform any sizeable reform in the public sector .
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The deficit was financed by transfers from the fiscal reserve (about BGN 1bn), government securities issued on the local market and some funding from abroad. As a result at the end of 2011 the fiscal reserve dropped to BGN 4.4bn, close to the level set by the Law on the Budget of BGN 4.5bn. In the first three months of 2012 the fiscal reserve continued falling to about BGN3.0-3.5bn, further limiting the Government's refinancing flexibility in a period of time when Bulgaria is due to face new challenges in the near term. First, the Government expects a fiscal deficit in the amount of nearly BGN 2bn this year. Second, this deficit may be higher due to the optimistic growth and revenue projections of the 2012 budget. Public revenues may fall short of expectations this year due to (1) worse-thanexpected macro environment as a result of the EU slowdown and (2) lower-than-budgeted absorption of EU funds (transfers are expected to increase by about 80% vs. the 2011 budgeted amount). Any populist measures such as lowering VAT could also put the projected public revenues at risk. Third, there is a significant external debt repayment of about BGN 2bn in the beginning of 2013. Altogether the country needs about BGN 5.5bn to meet its financing obligations in 2012 and 2013. Given the decreasing fiscal reserve as well as the capacity of local investors to buy government securities, the Government should tap international markets as soon as possible. The growing refinancing needs are the primary reason why the Government would like to allow the investment of the Silver Funds2 resources into securities issued or guaranteed by the Republic of Bulgaria. We welcome the attempt to diversify the Funds investment portfolio and to introduce a more flexible choice of financial instruments for investing the Funds assets. However, we express concerns that some provisions of the draft law may lead to unequal treatment of the different Funds investment instruments, which could create competition and market distortions. For example, the draft law does not require an investment grade credit rating to apply to securities issues by the Bulgarian government while such a rating is required for the rest of the debt instruments in which the Fund can invest its assets. 2012 Outlook Given that (1) in March12 the European Commission further decreased its expectation for the EU economy in 2012, (2) usually Bulgaria is impacted by any EU slowdown after two to three quarters and (3) individuals and corporates are likely to continue to save/delay investments due to high uncertain future prospects, it is reasonable to expect that economic recovery may weaken in 2012. However, current consensus expectations call for a GDP growth of 0.71.5% driven mainly by exports and sluggish improvement in consumption, especially during the second half of 2012 in line with some stabilization in the European Union as a whole. We note thatthere are still significant downside risks to this expectation related to the uncertainties about the successful resolution of the sovereign debt crisis in the EU peripheral countries.

Expectations for 2012 YoY real GDP growth Inflation, average CA Balance/ GDP Fiscal balance/GDP Date of publication year-

Government 1.4% 2.1% 11.3% 1.5% -1.6% Apr12

European Commission 1.4% 3% 2011 rate n.a. n.a. Feb'12

IMF 0.8% 2.1% 2011 rate 2.1% n.a. Apr12

Unemployment rate

The Silver fund is part of the fiscal reserve and has funds of about BGN 2bn. These funds will be used to finance government's pension liabilities starting 2018. In other words, this fund maintains, to a certain extent, the stability of the pension system in the country.

Government expectations* YoY real GDP growth Inflation, year-average Unemployment CA Balance/ GDP Fiscal balance/GDP Total government debt/GDP crisis 2.5% 2.4% 10.9% 0.1% -1.3% 18.4%

2013 3.5% 2.5% 10.4% -0.6% -0.5% 18.0%

2014 4% 2.5% 9.8% -1.2% 0% 16.4%

2015

* As of April 2012. These expectations are based on the assumptions of improvement in private consumption and no EU debt

KEY MACRO INDICATORS 2007 2008 2009 2010 2011 Mar 2012 Labor Market Une mpl oyme nt ra te 6.9 6.3 9.1 9.2 10.4 11.5 Avera ge monthl y wa ge s a nd s a l a ri e s (BGN) 431 545 609 647 707 n.a . Y oY growth 19% 27% 12% 6% 9% n.a . La bour producti vi ty (GDP pe r e mpl oye d pers on)** 103.2 103.5 97.2 105.1 106.1 n.a . Overall Macro Indicators Y oY re a l growth of GDP , % 6.40 6.20 -5.50 0.40 1.70 n.a . HI CP a vera ge a nnua l cha nge , % 7.6 12.00 2.50 3.00 3.40 1.90 Produce r pri ce i nde x, Y oY growth i n % 7.7 10.90 -6.30 8.50 9.40 0.80 I ndus tri a l producti on i nde x, Y oY growth i n % 9.6 0.7 -18.30 2.00 5.80 -1.80 BNB res e rves i n BGN m 23 346 24 865 25 267 25 380 26 108 25 801 BNB res e rves / ST e xte rna l de bt 127% 98% 107% 115% 134% 129%* BNB res e rve a s s e ts i n months of i mports 5.9 5.5 8.0 7.3 6.3 7* NET pos i ti on (Re s e rves + FDI-CAD-ST de bt), i n BGN m 7 528 -3 254 217 5 763 9 922 5072* 5-ye a r CDS be l ow 100 be l ow 500 a bout 200 a bout 250 a bout 280 a bout 280 BSYS T ota l As s e ts , Y oY growth 40% 18% 2% 4% 4% 5% T ota l net l oa ns , Y oY growth 46% 24% 4% 1% 3% 0% Ne t l oa ns to NFI, YoY growth 67% 32% 3% 0% 2% 2% T ota l Depos i ts , YoY growth 41% 13% 0% 6% 5% 6% De pos i ts from NFI, YoY growth 41% 7% 4% 8% 13% 11% Ne t profi t, YoY growth 42% 21% -44% -21% -5% 12% Loa ns to NFI / De pos i ts from NFI 93% 115% 114% 105% 96% 93% Loa ns overdue by more tha n 90 da ys / Gros s l oa ns to NFI e x overdra fts 2.6% 3.2% 10.6% 18.0% 21.9% 23.4% FX-de nomi na ted Loa ns to NFI / T ota l l oa ns to NFI 50% 57% 59% 62% 62% 65% FX de nomi na ted De pos i ts from NFI / T ota l depos i ts from NFI 50% 50% BoP Current a ccount i n BGN m -15 167 -16 004 CA/GDP , % -25.2 -23.1 Tra de Ba l a nce /GDP , % -23.5 -24.3 Fore i gn di re ct i n ves tments , net i n BGN m 17 704 13 159 Fore i gn di re ct i n ves tments /Curre nt a ccount de fi ci t, % 116.7 81.7 FDI/GDP , % 29.4 19.0 External Debt Gros s e xte rna l de bt/GDP , % 94.3 105.1 T ota l gros s e xte rna l de bt i n BGN m 56 752 72 848 Publ i c a nd publ i cl y gua ra ntee d e xte rna l de bt i n BGN m 8 004 7 698 Pri va te non-gua ra nte e d e xte rna l de bt i n BGNm 48 748 65 150 ST de bt/ Gros s e xte rna l de bt, % 32.3 34.7 ST de bt/GDP , % 30.5 36.5 Ba nks ' tota l debt i n BGN m 11 287 17 753 % of tota l gros s e xterna l de bt 19.9 24.6 ST de bt i n BGN m 8 501 13 421 Othe r s ectors ' tota l de bt i n BGN m 18 565 23 427 % of tota l gros s e xterna l de bt 32.8 32.4 ST de bt i n BGN m 9 982 12 221 I nte rcompa n y Le ndi ng i n BGN m 20 712 26 057 T ota l debt s e rvi ce i n BGN m 12 252 14 183 De bt s e rvi ce / GDP 22% 25% FX s tructure , i n % EUR 85.4 85.8 USD 8.6 7.4 othe r 5.9 6.8 Fiscal Balance ` Fi s ca l Ba l a nce /GDP , % on a ca s h ba s i s 3.30 2.90 T a x re ve nues i n BGN m 19 324 22 167 Expe ndi tures i n BGN m 22 103 25 323 Fi s ca l ba l a nce i n BGN m, on a ca s h ba s i s 1 960 1 990 **GDP pe r empl oye d - Vol ume i ndi ces of GDP pe r e mpl oye d a t pre vi ous ye a r = 100 (%) *a s of Fe b. 2012 54% -6 095 -8.9 -11.9 4 766 78.2 7.0 108.3 73 963 8 231 65 732 32.1 34.7 16 381 22.3 13 078 23 633 32.1 12 357 28 039 14 113 21% 88.7 6.3 4.9 -0.90 20 172 25 551 -530 50% -735 -1.0 -7.7 2 364 322.0 3.4 102.8 72 449 8 463 63 986 30.6 31.5 13 421 18.5 10 473 24 016 33.4 11 854 29 212 13 466 19% 87.7 6.4 5.8 -4.00 19 009 26 715 -2 783 41% 707 0.9 -5.1 2 623 n.m. 3.5 91.9 69 206 8 263 60 944 28.2 25.9 11 026 16.0 7 942 23 816 34.4 11 568 28 920 13 109 17% 46% -759 -1.0 -1.2 165 21.8 0.2 Feb'12 88.1 68 609 8 091 60 518 28.2 24.8 10 710 16.0 7 630 23 627 34.4 11 705 28 950 544 n.a .

88.2 n.a . 6.3 n.a . 5.2 n.a . -2.10 20 592 26 960 -1 582 -0.90 4 955 6 643 -687