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, the Bulgarian lev is pegged to the euro
- Corruption and organized crime (No. 74 in the Corruption Perception Index 2019, the most corrupt country in the EU)
- Inefficient public services and the judicial system (influence of the business community)
- Unstable government, the fragmented political landscape
- Lack of skilled labor
- Declining and relatively poor population (GDP per capita = 24% of the EU average in 2019)
- Strong informal economy
Rocky recovery, after COVID-19 recession and protests
After COVID-19 hit Bulgaria in early spring of 2020, the government announced the state of emergency, until at least end-April 2021, and introduced containment measures for single areas or groups of persons, including social distancing and travel restrictions. The number of COVID-19 cases and related deaths was relatively limited. While the Bulgarian GDP did grow slightly at the beginning of the year, it fell dramatically in the second quarter, bringing the economy into the strongest recession since 1999. The main issues were a lack of private consumption and investments, as well as a standstill of foreign trade. From Q3 2020 onwards, the economy entered a phase of recovery, initially strong but only progressing modestly since then, as it depends on not only domestic demand, which is again limited due to a strong second pandemic wave that led into a second lockdown from late November on until at least the end of January, but also on-demand from the main export destinations in the European Union. The Union accounts for over two-thirds of exports (especially Germany with 15% of exports). The impact of the recession was cushioned partly by some public stimulus measures, i.e. the coverage of some parts of employees’ wages (over 1.2% of GDP), corporate tax deferrals (0.5% of GDP), a minimum wage subsidy, and VAT reductions for single items and services. Furthermore, the government tried to calm the protest movement with another stimulus package worth BGN 1.16 billion (1% of GDP) and announced further support for the year 2021 due to the second lockdown.
Emerging public deficit and a lower current account surplus
Because of the lower demand for Bulgarian goods and the decrease in tourism, the current account balance should shrink, but remain in surplus in 2020. By 2021, tourism should slowly recover, which would increase the current account surplus again, while the balance of investments (negative) and the balance of personal transfers (positive) compensate each other. However, the goods trade deficit should again increase somewhat in 2021, due to stronger demand for foreign products in Bulgaria. This will cushion the increase of the current account surplus. The public balance registered a strong deficit in 2020, violating the Maastricht criteria, and should persist in 2021, albeit at a reduced level. Public debt will remain very low.
On 11 July 2020, Bulgaria joined the European Exchange Rate Mechanism 2 (ERM II) and the European Banking Union. In this “waiting room” for the euro, the Bulgarian Central Bank has to hold on to the peg of BGN 1.96 per euro (+/-15%), as well as to the Maastricht budget and debt criteria. The long-term interest rates should remain near that of the lowest ones in the eurozone. While this should be manageable for the transition period of 2 years minimum, the criterion that the inflation rate can only be at a maximum of 1.5 pp. above inflation across the three eurozone member states with the lowest inflation rate could become problematic.
Scandals, protests, and elections
Since 9 July 2020, Bulgaria has been in a state of continuous protest against the government, due to various scandals concerning the corruption of government members, as well as personal enrichment and influencing press coverage. This culminated in an unfounded raid on Bulgaria’s President Rumen Redev (non-partisan), who, while holding a rather ceremonial office, has repeatedly vetoed the legislative proposals of Prime Minister Boiko Borissov (from the center-right GERB). The anti-government protests mainly involved extensive road blockades but turned into violent protests in September. While an opposition vote of no confidence failed, the protests led to a change in the government. Furthermore, Borissov offered to resign if a new constitution was voted (although the constitution would provide that only people with a higher level of education would have the right to vote). Several opposition parties have boycotted the parliament since then. In this context, it is difficult to foresee whether the government will be able to stay in power until the next general election on 4 April 2021. Nevertheless, the chances exist, as the government can count on a clear majority in parliament with 137 of 240 seats. Presidential elections are also scheduled for October/November 2021.