Bulgaria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified productive base
- Low public debt
- Tourism potential
- Low production costs and good price competitiveness
- Monetary stability
- Corruption and organized crime
- Inefficient public services and judicial system (influence of the business community)
- Unstable government, fragmented political landscape
- Lack of skilled labor
- Declining and relatively poor population (GDP per capita = 50% of the EU average)
- Informal economy (estimated at 20% of GDP)
Solid growth, still driven by domestic demand
Growth will remain solid in 2020, fuelled by persistently strong domestic demand. Household consumption will continue to drive activity against a backdrop of historically low unemployment (5.3% in September 2019) and wage increases, both in the civil service (+10%) and in the private sector (minimum wage raised by 9% to BGN 610, or €310). Besides these statutory increases, wages will also be driven by the shortage of skilled labor. At the same time, investment will continue to grow briskly, driven by public investment, despite low absorption of European structural funds (one-third of the funds for the 2014/2020 period had been used by mid-2019), and by the private sector, in a context of supply constraints, with the capacity utilization rate at 77% in the fourth quarter of 2019. In addition, the health of the banking sector is constantly improving – the non-performing loan ratio stood at 7.2% at the end of June 2019, ten points lower than during the 2014 banking crisis – which will support vigorous credit growth. Although the regional environment will remain weak, particularly in the European Union, which accounts for more than two-thirds of exports (especially Germany, Bulgaria’s main partner on 15% of exports and Italy on 9%), exports should rebound after a tough 2019 thanks to the recovery in Turkey (8%) and the fact that the workforce is still competitive. Imports are expected to put in a vibrant performance, reflecting domestic demand, while foreign trade should be less of a growth dampener than in 2019.
Public and current account surpluses
After showing a deficit in 2019 due to the purchase of eight American fighter aircraft (USD 1.3 billion, or 2% of GDP), the public accounts should return to surplus in 2020, despite strong expenditure growth, thanks to equally dynamic revenues. Revenues, which come mainly from taxes (60%, half of which is due to VAT) and social contributions (20%), are particularly sensitive to economic growth. As in previous years, the government plans to significantly increase social spending and the budgets allocated to health (+10%) and education (+14%), including a 17% hike in the average salary for teachers. The return to surplus accounts will ensure that public debt, which is already low, will maintain its downward trend of previous years and return to the levels seen before the 2014 bank rescue, which resulted in a 10-percentage-point increase in public debt.
Bulgaria is expected to continue to post a substantial current account surplus, despite a chronic trade deficit (3.3% of GDP in 2018). Brisk performances by the tourism and road transport sectors have led to a significant surplus in the services balance (6% of GDP), while the transfer balance is also in surplus (2.6% of GDP), thanks to European funds and remittances from expatriates. The current account surplus and foreign direct investment (net inflows: 2.2% of GDP) are used to finance portfolio investment abroad and build up the comfortable foreign exchange reserves (equivalent to around nine months' imports) needed to safeguard the credibility of the lev's peg to the euro.
Local elections have strengthened the Prime Minister’s position
Prime Minister Boiko Borissov of the center-right Citizens for the European Development of Bulgaria Party (GERB) held onto power after early elections in March 2017 by forming a coalition with the United Patriots, an alliance of three nationalist political parties. He then emerged relatively stronger from the November 2019 local elections. Although down from 2015, when it won 22 out of 28 regions, his party remains the main political force in Bulgaria, taking victory in 16 regions, including Sofia. By way of comparison, the Bulgarian Socialist Party (BSP), which had doubled its seats in Parliament in 2017 from 39 to 80 seats out of a total of 240, won only four regions. However, the diversity of the governing coalition makes it structurally vulnerable and the possibility that fresh tensions may cause early elections to be held before March 2021 cannot be ruled out.
The country's accession to the European Exchange Rate Mechanism 2 (ERM II) and the European Banking Union, in order to prepare for the country's entry into the euro area, was initially planned by the government for July 2019, but was postponed to April 2020, subject to validation by the ECB. Accession will be conditional on the implementation of recommendations to correct capital shortfalls at FiBank and Investbank identified during the stress tests published in July 2019. Despite solid macroeconomic performances, sound fiscal policies and monetary stability, the country continues to suffer from a difficult business environment, including the highest level of corruption in the European Union, according to Transparency International's ranking (77th out of 180 worldwide).