Bulgaria: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
- Fixed parity with the euro (1 euro = 1.96 lev) backed up by large foreign currency reserves
- Diverse productive base
- Low production costs: good competitiveness
- Low public debt
- Numerous tourism assets
- Governmental instability, fragmented political landscape and proximity to the business world
- Corruption and organized crime
- Mediocre effectiveness of public services and justice (influence of the business world)
- Inconsistent use of European structural funds
- Still-insufficient supervision of the banking sector
- Lack of skilled labor and high long-term unemployment (61% of the total)
- Low proportion of rural dwellers, Roma and older people in the active population
- A relatively poor (GDP per capita = 45% EU average) and declining population
Moderate growth underpinned by domestic and foreign demand
Despite the (timid) return of inflation, household consumption will probably remain the main driver of growth. Their incomes are boosted by the lack of skilled labor, resulting from both inadequate training and emigration. The rise in the minimum wage and in employment, particularly in manufacturing and retail, are also having a positive impact. Thanks to the upturn in lending in the 2nd half of 2016, in the wake of the results of stress tests confirming the consolidation of the banking sector, private investment should continue to grow. After falling because of the transition between two European funding programs, public investment seems set to rise again. However, there are still scars from the excesses and the associated over indebtedness, culminating in the bankruptcy of the country's fourth-largest bank in 2014, and they will encourage households and businesses to be prudent, at least until the early parliamentary elections scheduled for spring 2017. Exports, which are diverse, encompassing cereals, oleaginous products, tobacco, clothing, medicines, machines, metals and electricity, should maintain their moderate rate of growth. They are still competitive, because salaries, despite having risen more than productivity since 2013, remain low. Nonetheless, with imports buoyed by the resilience of domestic demand, the positive contribution made by foreign trade might fall.
Solid public and foreign accounts, but costly state-owned companies
Despite the bank rescue of 2014-2015, the level of public debt remained modest. The rise of 2016 can be explained by prefinancing which increased state reserves. Thanks to the low deficit, which is scheduled to disappear by 2020, and growth higher than the average interest rate, debt will probably fall. Budgetary consolidation will probably resume after a slight loosening likely in the run-up to the elections of spring 2017. It will be restrained (the prime minister had to leave office in February 2013 amid public dissatisfaction caused by an increase in electricity prices) and focused on reducing personnel spending and procurement, and on increasing excise taxes and social security contributions. There is considerable room for improvement. The shadow economy is estimated at 30% of the total economy. State-owned companies (electricity, railways, post office, and water) generally post mediocre performances and some are loss-making. Their debt is significant, but, for the most part, it is not backed by state guarantees. The national electricity company (NEK) is a victim of under-pricing and has debt equivalent to 8% of GDP. It should benefit from an interest-free government loan equivalent to 1.4% of GDP to compensate a Russian manufacturer for the cancellation of the Belene nuclear power station. In this event, the deficit and public debt would rise by the same amount. Public sector reforms would be a way of increasing public investment, which accounts for just 6% of GDP, despite the delays in road infrastructure projects and the European contribution.
Despite the good price competitiveness of its exports, in 2015 the country had a trade deficit of 5.8% of GDP, which is likely to increase given strong domestic demand. This can be explained by its energy dependency: 35% of needs are met by foreign sources, including 11% by Russia (all its gas) and the need to import capital goods. This deficit is more than offset by the surplus in services (6.8% of GDP) thanks to road transport and tourism centered on the Black Sea beaches. Moreover, the repatriation of dividends by foreign investors and the payment of foreign debt interest (these two items account for 4.2% of GDP) are almost offset by remittances from expatriates. The slight current account surplus, European funds and direct inward investment allow Bulgaria to boost its foreign currency reserves, the abundance of which (more than 9 times imports) lends credibility to the pegging of the lev to the euro, while also servicing foreign debt, which amounted to 77% of GDP (at the end of July 2016), is falling, and is mainly payable by businesses, with intragroup loans alone accounting for one third.
Governmental instability and political fragmentation hinder reforms
Prime Minister Boyko Borisov resigned following the defeat of the candidate he backed in the November 2016 presidential elections. Since October 2014, he had led a coalition government dominated by his center-right party, Citizens for European Development of Bulgaria (GERB), which lost its majority in May 2016 following defections. The electorate wanted to signal their weariness with their relatively low living standards, inequalities sustained by a 10% flat tax, corruption, organized crime and vote buying. Unless a new majority government can be formed, the new socialist (PS) president Rossen Radev will have to call early elections in spring 2017. The proportional voting system could be jettisoned, which would reduce the fragmentation of the political landscape, the reliance of the two main parties (PS and GERB) on the good will of multiple small groupings, governmental instability and the frequency of early elections.