By Michalis Makris, EIG Investment Consultant
Michalis Makris, EIG Investment Consultant
There is no doubt that the recent economic crisis has left its marks on the Bulgarian economy as well. Nonetheless, there are strong arguments to support that once international markets start to recover, Bulgaria, currently the EU’s poorest state, will probably offer the highest development prospects and investment returns in the Central and Eastern European region.
In June, the European Bank for Reconstruction and Development became the latest addition to the club of institutions forecasting a contraction of Bulgaria’s economy in 2009. It estimated that Bulgaria’s GDP growth will shrink by 3% this year and a further 1% in 2010. This estimate is in line with the predictions made by the European Commission in the beginning of June 2009. Moreover, a recent article in the Financial Times, dated June 10th 2009, stated that in the first quarter of 2009, the Bulgarian GDP fell by 3.5%. This is the first tangible proof that Bulgaria has been hit by the crisis. It is also the first time that Bulgaria’s GDP dropped since the financial and economic crisis of 1997.
When it comes to market analysis and forecasts, various international publications tend to put all Central and Eastern European countries in the same ‘basket’. It would be groundless to claim that the economy in Bulgaria is in the same situation as that of Hungary, Latvia and Ukraine. Bulgaria’s banking system still looks sound, with a good level of liquidity and healthy reserves. Furthermore, a significant level of the effects of the current economic crisis in Bulgaria will be mitigated by the country’s record grain harvest.
Nonetheless, the main economic problem that Bulgaria is now facing is the current account deficit, which is the highest in South-eastern Europe, at about 24 per cent of GDP. Given the accelerating decline in foreign direct investment, the current account deficit appears unsustainable. Mr. Boyko Borissov, Bulgaria’s new Prime Minister and leader of the GERB party, claims that the state budget for 2009 shall be patched up only if the country secures its share of the next wave of planned EU spending, which is approximately 12 billion euro. These funds will be poured into infrastructure and will undoubtedly energize the Bulgarian economy.
On a general note, very few economies in the world have positive growth forecasts for 2009. These economies tend to be very small in size (e.g. Cyprus), and the projected growth tends to be very small too, between 1 to 2%. Recession is a cycle that once completed, will be followed by a cycle of growth and prosperity. Medium to long-term investors should try to identify the markets that will offer the greatest prospects for development and the highest investment returns, once the economic crisis is over. I believe Bulgaria is one of these markets.
On the social, economic and political fronts, we see Bulgarians demanding a change. They demand justice in a system that still has a lot to do to combat corruption. Last July around 60% of registered Bulgarian voters exercised their right to vote in the country’s parliamentary elections. This is a record voter turn-up! Around 40% of these voters supported the ex-mayor of Sofia, Mr. Boyko Borissov, who as stated above in the new Prime Minister of the country. Mr. Borissov built his election campaign on the promise to fight corruption.
Last November, Bulgaria lost €520m ($677m) of European Union funding for failing to crack down on fraud and corruption among officials that were appointed to handle these EU funds. That was the first time in the last 50 years that the European Commission had stripped a member state of funds in this way. As a result, Bulgaria lost €220m of pre-accession funding. Also, the government had to use funds from the budget to cover another €300m worth of contracts that were frozen by the Commission last July because of suspected fraud; these funds are expected to gradually be released, provided that Bulgaria continues to clean up graft.
Combating corruption is top priority for the new prime minister. He considers corruption to be the greatest threat to Bulgaria’s national security. He said that corruption can erode anything: judicial system, intelligence services and statehood. By fighting corruption, Mr. Borissov has vowed to create maximum good conditions for investors in Bulgaria, claiming that now is the best time to invest.
The steps proposed by Mr. Borissov, for the strengthening of the Bulgarian economy include the following:
- Greater support for the agricultural sector. In the times of its hardest national catastrophes, Bulgaria has paid off its reparations thanks to its agriculture.
- Increased dialogue between the Government and the Bulgarian Employer’s Association for the development of new procedures, so that Bulgarian enterprises, the majority of which is now privately-owned, will function more effectively and follow patterns that resemble those of more developed economies.
- Creation of high-tech zones and new relevant legislation that will attract foreign international high-tech powerhouses to invest in Bulgaria. In the case of Romania, Nokia has outsourced all of its manufacturing there. It should be noted that Romania offered Nokia the land for free. Nokia now has forty to fifty thousand highly qualified specialists working there already. If Bulgaria copies this example, the software and hardware specialists will not have to leave the country. This trend could be followed in other industries as well, so that more sectors flourish and more employment opportunities are created. The end result would be an impressive increase in the country’s domestic product and a healthier current account balance.
- The Bulgarian Government will soon proceed with the connecting of the Customs and the National Revenue Agency with a joint communication system. This will largely reduce the contraband; it will also create opportunities for the development of the textile industry, agricultural products, oil and petrol products, etc. It should be noted that currently the smuggled goods in Bulgaria are estimated to be over 50%, which suggests that pretty much everything is contraband.
All the above measures when adopted, will drastically patch up the state budget. In this way, Bulgaria won’t have to actually decrease salaries and pensions.
In conclusion, Bulgaria is going through a very critical period, which will prove to be decisive for its future development and economic and political positioning in the region. Bulgarians demand change and the momentum is now irreversible. Mr. Borissov’s recent election victory sends out a loud and clear message: Bulgaria will move forward mo matter what. Perceptive investors should be able to see that. Clever investors should act on it!