Bulgaria: Risk Assessment
Country Rating1
Rating: B
Business Climate Rating1
Rating: A4
Risk Assessment2
Economic recovery falling short of pre-crisis levels
After stagnating in 2010, economic growth is expected to resume but remain below pre-crisis levels (6% on average from 2003 to 2008). Foreign direct investment inflows, which made a crucial contribution to pre-crisis dynamism, particularly in the financial and property sectors, are expected to rebound to 8% of GDP but remain well below the levels reached before 2008 (20% of GDP). The energy sector (distribution networks) will particularly benefit from this resurgence in foreign direct investment. Meanwhile, public-sector investment, will benefit from better absorption of European funds, but private domestic investment, especially in the construction sector, will remain sluggish. Exports (50 % of GDP), particularly by the textile and paper sectors, will be stimulated by the further gains in competitiveness . However, household consumption is only expected to make a moderate recovery with unemployment remaining high (9% of GDP), due mainly to the sluggishness in the construction sector.
Partial adjustment of external imbalances
After the very harsh correction of external imbalances in 2009 2010, the current account deficit is expected to remain limited. However, the sustainability of that adjustment in the medium term will depend on Bulgaria's capacity to channel foreign direct investment away from non-tradable sectors (banks, construction) to tradable sectors (energy, manufacturing). Moreover, foreign debt has been very high, over 135% of GDP. In the short-term, the country thus remains highly dependent on foreign capital in financing its large private foreign debt with FDI trending down. But although parent banks are expected to stand by their commitments to their Bulgarian subsidiaries in 2011 as they did in 2009, a tightening of financing conditions in the wake of the repercussions of the Greek sovereign crisis is not out of question: Greek banks hold a 25% ownership stake in Bulgarian banks, and West European banks, also exposed to Greek sovereign risk, hold a 60% ownership stake. In this context, and even if that was not the case in 2009, recourse to IMF assistance in order to maintain the currency board regime remains a realistic option despite significant replenishment of foreign exchange reserves.
A balanced budget and limited public debt
The economic downturn was responsible for only a limited deterioration in public-sector finances. With the government consistently running fiscal surpluses before the crisis, a public debt that was down to a low 14% of GDP in 2008 will be unlikely to exceed 20% of GDP. Government financial support was not needed by the banking sector, which proved relatively resilient to the global crisis. Moreover, the government was able to maintain the level of its fiscal reserves, which cover a year of service of the public debt (interest and repayment). In this context, Bulgaria will be the only European Union country in a position to comply with the Maastricht criteria (3% deficit) from 2011, thanks to the growth of fiscal revenues alone and without drastic reductions in spending.
Governance in need of improvement
The center-right party (GERB) that emerged victorious from the July 2009 legislative elections has continued to govern alone without a parliamentary majority, relying on the support of another center-right party and the various right-wing formations. Despite growing social unrest, the tight economic policy pursued these past years is expected to be maintained, particularly with the prospect of joining the European exchange rate mechanism (ERM2). However, despite significant efforts from the authorities, decisive progress is yet to be made on reforming the legal system, fighting corruption, and managing community funds.
Strengths
- Growth prospects enhanced by accession to the European Union
- Prudent macroeconomic policies
- Healthy banking sector
- Cushion of foreign exchange and fiscal reserves
- Skilled workforce
Weaknesses
- Growth based excessively on property, construction, and financial intermediation
- Excessive current account deficits
- Heavy private foreign debt
- High corporate exposure to exchange rate risk
- Lack of progress on governance