Bulgaria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Fixed parity against the euro (1 euro = 1.96 lev) backed up by significant foreign exchange reserves
- Diversified productive base
- Low production costs: good competitiveness
- Low public debt
- Many tourist assets
- Government instability, fragmented political landscape and close ties to the business community
- Corruption and organized crime
- Mediocre effectiveness of public services and legal system (influence of business circles)
- Poor use of European structural funds and mediocre infrastructure
- Supervision of banking sector still inadequate
- Lack of skilled workforce and high long-term unemployment (61% of the total)
- Low rate of participation in the labor market by rural workers, Roma community and older people
- Relatively poop (per capita GDP = 45% of EU average) and declining population
Growth Sustained by Domestic Demand
In 2018, household consumption will continue to be the main contributor to growth, despite slightly higher inflation. Households will benefit from higher wages resulting from the lack of a skilled workforce linked to inadequate training and emigration. A higher minimum wage and jobs growth will also provide a boost, with unemployment at a historic low (6.7% in October 2017). Meanwhile, higher bank profits and the decline in non-performing loans have helped consolidate the banking sector, weakened in 2014 by the collapse of the country’s fourth largest bank. Combined with satisfactory stress test results and low interest rates, this will continue to encourage borrowing, both by households and businesses. Private investment will benefit from positive export trends as well as the recovery in residential property. Construction will also be buoyed by robust public investment, associated with better use of European structural funds. Tourism growth will be more modest, due to the stabilization of the security situation in Turkey, as the country broadly benefited from Turkey’s decline as a tourist destination. Nonetheless, exports of goods will continue to be underpinned by dynamic European Union demand (67% of exports). They are still competitive, as salaries remain low, despite outpacing productivity gains since 2013. The country exports a huge variety of products such as cereals, oilseed crops, tobacco, medicines, machinery, metals and electricity.
Sound Public and External Accounts
The 2018 budget provides for a substantial increase in spending on education (higher salaries for teachers), social protection (higher pensions) and defense. Public investments are expected to increase by 50%, thanks to the implementation of infrastructure projects with the assistance of European structural funds. Despite higher spending, the fiscal deficit will remain weak in 2018, due to the accompanying rise in tax receipts. These will be boosted by domestic demand, improved tax collection and the award of operating license for Sofia Airport, income from which is intended to shore up the heavily indebted national railway. Despite the bank rescue in 2014-2015, the public debt burden has remained modest. The increase in 2016 is explained by prefinancing used to boost government reserves. Thanks to the weak deficit and growth above average interest rates, the debt burden should ease.
Despite the favorable exports trend, the trade deficit will remain considerable (5.8% of GDP in 2017) because of lively internal demand and rising energy prices. This deficit will be more than offset by the services surplus (7.4%) generated by road transport and tourism on the Black Sea beaches, but which could decline as more Bulgarians travel abroad. Meanwhile, remittances from expatriate workers and European subsidies (3.4%) have exceeded dividend repatriation by foreign investors and the payment of external interest rates (2.3% of GDP, both taken together). The current account surplus, European funds and foreign direct investments all help to fuel foreign exchange reserves whose abundance (over 9 months of imports) ensures the credibility of the lev’s peg to the euro. They also allow the gradual repayment of the external debt (70.7% of GDP), which is mainly private and a third of which alone is represented by intragroup loans.
The EU Presidency Will Maintain Precarious Political Stability
Following the defeat of the candidate he supported during the November 2016 presidential elections, Prime Minister Boyko Borissov stood down. His center-right party, Citizens for the European Development of Bulgaria (GERB), nonetheless won 32.5% of the votes cast in the early elections held on 26 March 2017, while the Bulgarian Socialist Party almost doubled its 2014 share of the votes to reach 27%. Prime Minister Boyko Borissov was thus forced to form a coalition with the United Patriots, which won 9% of the votes by bringing together three ultra-nationalist parties, including the extreme right, pro-Russian Atalka. Achieved at the cost of fiscal concessions and vulnerable to splits on foreign policy, the very relative stability of the coalition is, however, expected to last at the expense of wide-ranging reforms, thus confirming the ongoing dependence of the two main parties on several small groupings. A tacit agreement between the different political alliances will help stabilize the political situation during the first half of 2018, which is the year in which the country will hold the Presidency of Council of the European Union. However, the frequency of early elections is a factor of instability, especially as electors are starting to express their frustration with their relatively low standard of living, the inequalities of a flat-rate tax of 10%, corruption, organized crime and vote buying.