Bulgaria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified productive base
- Low public debt
- Tourism potential
- Low production costs and good price competitiveness
- Corruption and organized crime
- Inefficient public services and judicial system (influence of the business community)
- Unstable government and 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)
Domestic demand will remain the chief growth driver
After a slight slowdown, Bulgarian growth is expected to stabilize in 2019. As in the past, domestic demand will remain the main driver of growth – even if it will increase less vigorously than in 2018. It will benefit from the high level of household confidence and rising wages in both the public and private sectors, against a backdrop of skill shortages. The historically low unemployment rate (5.3% in July 2018) and the 10% increase in the minimum wage planned for 2019 will also have a positive impact. Despite their low absorption rate, European Structural Funds, together with increased capacity utilization (77% in the third quarter of 2018), will stimulate investment (21% of GDP in 2017). In addition, consolidation of the banking sector – which began in the wake of the 2014 banking crisis – will continue, with a reduction in non-performing loans and an increase in credit. The textile sector (10% of exports) will continue to expand, helped by the competitiveness of the Bulgarian workforce. However, exports could suffer from more muted growth in some European Union countries (65% of exports) and Turkey (8%).
After increasing in 2018, partly due to higher energy and fuel prices, inflation is expected to hold steady in 2019, again supported by household consumption.
Public and external accounts still in balance
The small government surplus is expected to change only slightly in 2019. However, expenditure is set to surge due to increases in the minimum wage and in public sector salaries. More spending is also ahead for social policies (50% more than in 2018), as well as in health and defense. With the help of European Structural Funds, the implementation and continuation of infrastructure projects will lead to an increase in public investment. This is not expected to lead to a significant reduction in the government surplus, as revenues will also go up: as revenues are mainly derived from taxes (62% of revenues in 2017), collection will be favored by lively economic activity. Despite the bank rescue in 2014/15, the burden of public debt remains moderate and is expected to continue to decline in 2019, thanks to the preservation of the government surplus.
Nevertheless, the country's external situation is not as robust. The current account surplus is set to shrink once again. Although it will be offset by the surplus in services (6.2% of GDP in 2017), linked to tourism and road transport, the trade deficit (2.4% of GDP in 2017) is expected to widen in 2019, as domestic demand stimulates imports. The balance of transfers will remain in surplus (2.5% of GDP in 2017), thanks to European subsidies and expatriate transfers. The current account surplus and inward foreign investment (other than FDI) will make it possible to build up foreign exchange reserves, which are equivalent to nearly nine months of imports. These reserves are needed to maintain the credibility of the lev's peg to the euro.
Fragile political stability
Following early parliamentary elections in March 2017, which allowed the Bulgarian Socialist Party (BSP) to double its seats in Parliament, Prime Minister Boiko Borissov of the center-right Citizens for the European Development of Bulgaria Party (GERB) was forced to form a coalition in order to maintain a parliamentary majority. He concluded an agreement with the United Patriots, itself an alliance of three nationalist political parties, allowing him to obtain 122 of the 240 seats in the legislative body. Since then, the opposition has tried to overthrow the government through motions of censure, all of which have been rejected, in a sign of relative political stability. However, this stability is likely to be further weakened by tensions within the coalition, particularly between the three parties forming the United Patriots alliance.
In August 2018, the government approved a reform programme with a view to joining the European Exchange Rate Mechanism 2 (ERM II) and the European Banking Union by the end of summer 2019, in order to prepare the country for entry into the euro area. These reforms relate, in particular, to the procedures to be followed in the event of company bankruptcies, the management of state-owned companies and the independence of the National Bank of Bulgaria. Although the country was removed from the list of nations with excessive economic imbalances in March 2018, and although the ECB and the European Commission confirmed that – with the exception of ERM II accession – Bulgaria fulfilled the Maastricht criteria, its social progress seems less clear-cut. The country has one of the highest poverty rates and the highest level of income inequality in the European Union.