BULGARIA ECONOMY

MATTER OF NUMBERS

DimanaT — Thu, 03 Sep 2020 05:38:10 +0000

MATTER OF NUMBERS

by Dimana Trankova; photography by Anthony Georgieff

DimanaT Thu, 09/03/2020 - 08:38

Bulgaria's economy, society, finances after 6 months of Covid-19

Bank of Bulgaria

Six months after the Covid-19 pandemic forced the world into lockdowns and uncertainties, a fuller picture of its effect on the world economy is beginning to emerge. Bulgaria fared not too bad, according to recent statistical data.

According to Eurostat, in the second quarter of 2020 Bulgaria's GDP fell 9.8 percent in comparison to the same period of 2019. The result is better than in most of the EU, where average GDP fell by 14.4 percent and France experienced a decrease of 19 percent.

Unemployment data also looks encouraging. According to the National Statistical Institute, or NSI, between April and June 6 percent of Bulgarians were unemployed (Eurostat data claims a seasonally adjusted result of 4.6 percent in May). This is a significant increase from the 4.2 percent on a year earlier, but fits the EU's average of 6.7 percent. It is much better than Spain's 14.5 percent.

Data released in August by the Bulgarian National Bank, or BNB, shows a negative trade balance of 0.4 percent of the GDP for January-June 2020, compared to 1.6 percent on a year earlier. Exports have dropped by 7.5 percent and imports have decreased by 12 percent.

The average annual inflation for 2020 is 2.6 percent higher compared to 2019, according to the NSI. The biggest increase in prices was in the tourism and holiday industry (16 percent), central heating services (15 percent), bank and financial services (11 percent), and entertainment and culture (7.4 percent).

The NSI's traditional consumer attitude survey for July 2020 shows that consumer trust has increased by 3.3 percent in comparison to April 2020. Villagers are more optimistic than urban residents that the economy will improve in the next 12 months.

Notwithstanding the government's less-than-efficient policies to help households and companies mitigate the effect of the lockdown, the numbers look encouraging, yet it is too early to celebrate. As a general rule, trends in the Bulgarian economy tend to lag behind the economies of its main EU trading partners. Bulgarian citizens returning from the EU during the lockdown injected fresh cash into the country and its economy.

The data also does not cover summer tourism, a sector that is among the most heavily affected globally. Preliminary figures are devastating. In June 2020, the NSI registered a staggering 88 percent drop in revenue for hotels and other holiday accommodation compared to June 2019. As package tourism crashed and charter flights to the Black Sea resorts were cancelled, four- and five-star hotels suffered the heaviest blow. In June 2020, only 31 percent of hotel guests were foreigners, a decrease of 95 percent compared to June 2019.

Tourism is not the only sector affected by the crisis. According to the NSI, during the lockdown Bulgarian households cut back consumption on everything, except alcohol and tobacco products. A survey among Bulgaria's largest supermarket chains showed a 23 percent drop in customers and 11 percent decrease in profits in the first half of 2020, a direct result of lockdown. Customer behaviour also changed dramatically. The hectic stockpiling of nonperishable foods and toilet paper at the beginning of the lockdown was followed by more level-headed and pragmatic purchases afterwards.

There are also some paradoxical results. In July 2020, the government reduced VAT on food and alcohol sold by restaurants and bars from 20 to 9 percent. This change was promoted as a measure to help a sector that was suffering heavily from the lockdown, and professional organisations claimed that it would result in lower end prices. According to the NSI, however, the opposite happened: in July 2020 restaurant prices increased by 2 percent.

The BNB reports that in the second quarter of 2020 loans in arrears increased by 14 percent, the result of Bulgarians losing jobs and incomes during lockdown. The good news is that overdue loan payments make up only 7 percent of all loans, a significant decrease from the 20 percent registered in 2016.

Banks and companies are getting more cautious and lending continues to decrease, a trend that started before the Covid-19 pandemic. In the second quarter loans have grown by 4.9 percent on an annual basis, compared to 7 percent in March 2020.

Unsure about the future, Bulgarians continue to keep their money in banks, despite the record low interest rate, an average of 0.1 percent. BNB data shows that in June 2020 household deposits reached 57 billion leva, which is 4 billion leva more than in June 2019. The devil is in the details. BNB data shows that during the lockdown small savers closed about 150,000 deposit accounts with less than 1,000 leva in them and more than 23,000 accounts with up to 2,500 leva in them. Just like everywhere else, in Bulgaria, too, the rich got richer during the crisis. Deposits of between 50,000 and 500,000 leva rose by 10 percent and deposits over 1,000,000 leva saw a 14 percent increase. Forty-five more Bulgarians joined the ranks of millionaires.

Meanwhile, Bulgarian businesses struggle to collect money and payments from... the state. According to the Economy Ministry, by the middle of 2020 national and local governments are yet to pay 220 million leva to companies and citizens. This is why it is hardly a surprise that many companies are on the verge of collapse. A survey by the NSI showed that in July 34 percent of all companies reported a decline in their revenues, 13 percent sent employees on unpaid furlough, 8 percent fired staff and 3 percent reduced salaries.

Issue 167-168 coronavirus

BULGARIA ECONOMY

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BORISOV'S FIASCO

DimanaT — Sat, 05 Jan 2013 12:53:10 +0000

BORISOV'S FIASCO

by Anthony Georgieff

DimanaT Sat, 01/05/2013 - 14:53

GERB rulers fail to tackle economy, outlooks for 2013 are even bleaker

Nowhere is the abyss between what Boyko Borisov's GERB says it is doing and what it in fact does so obvious than in the economy of what firmly remains the EU's poorest state. Despite the flamboyant media appearances and the merry assertions by senior GERB officials that Bulgaria is grappling the economic crisis successfully, the country remains bogged down in an economic deadend that seems endless unless new idea, new policies and first and foremost new personalities are brought in as soon as possible.

The findings of a poll conducted at the beginning of December by the Bulgarian Industrial Association indicate that 75 percent of Bulgaria's businesses think 2012 was worse than the preceding year in terms of overall economic performance. 21 percent say it remained unchanged, and just 2 percent claim it improved.

Over 500 corporate managers and owners participated in the poll.

Of them 46 percent think that the economic status of their companies deteriorated in 2012, 33 percent say they managed to keep their economic performance at 2011 levels, and 16 percent claim their economic indicators improved.

According to the poll, sales across the board plummeted by 61 percent on an year earlier, followed by investments (a 51 percent decrease), production (a 49 percent decrease) and jobs (a 47 percent decrease).

79 percent of those interviewed consider the GERB's methods of tackling the situation "a failure." 12 percent remain undecided, while 9 percent are in approval.

About a half of those interviewed are pessimistic about what 2013 holds for the Bulgarian economy and anticipate a further deterioration. 30 percent do not expect any change and 16 percent hope for an improvement.

65 percent of those polled do not plan to apply for EU funding in 2013. 26 percent intend to apply while 9 percent remain undecided. 39 percent of the respondents who do not plan to apply cite lack of own funding as the main reason. 14 percent doubt the transparency of the application process.

53 percent of those polled will keep the salaries in the companies at their previous year's levels, 12 percent intend to slash them, and 9 percent have not made a decision.

Over half of the respondents think crime, corruption, the grey economy and administrative pressures have increased in 2012.

This is exactly the opposite of what Boyko Borisov's GERB says it has achieved.

With its policies GERB has failed to encourage the development of small- and medium-sized enterprises, the backbone of any country's middle class, critics of the GERB rulers say. Despite the claims of Prime Minister Boyko Borisov that his associates have "bridled" the "monopolies" (large companies in telecommunications, oil and energy distribution, and banking), in fact the opposite is true.

Some observers say that while the situation in Bulgaria looks reasonable on the macro level, things have deteriorated significantly at the micro level, which is one of the reasons why foreign investment and property acquisitions in Bulgaria have plummeted and in some areas are non-existent.

Issue 75-76

BULGARIA ECONOMY

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WHITHER GOEST THE ECONOMY?

DimanaT — Fri, 02 Mar 2012 10:58:33 +0000

WHITHER GOEST THE ECONOMY?

text and photography by Anthony Georgieff

DimanaT Fri, 03/02/2012 - 12:58

2011 was awful but 2012 will be worse, Bulgarians think

From bad to worse? According to a poll by Alpha Research published at the end of 2011, the majority of Bulgarians consider 2011 to have been "the worst" since the economic collapse of 1997. In that year, a Socialist government allowed a bunch of banks to go bust, three-digit hyperinflation ran wild, the overwhelming majority of Bulgarians lost their life savings and a few select "businessmen" made a fortune by borrowing in leva whilst repaying in hard currency. Those were the years of petrol smuggling into what was then Yugoslavia, of unbridled corruption in the customs service and of a general breakdown of law and order.

Coming back to 2011, just 10 percent of those polled consider it to have been "better" than the previous year, while 51 percent say it was significantly worse.

Against this pessimistic background, the majority of Bulgarians view 2012 with trepidation. They fear that the economic crisis will worsen, inflation and unemployment will go up, and incomes will drop further.

In Bulgaria's "boom years" of 2004-2008, a quarter of Bulgarians thought the country was moving in the right direction. After the 2009 general election, when Boyko Borisov's GERB assumed power, the number of optimists increased to 30 percent of those polled. At the end of 2011, however, their number has gone down to just 14 percent, according to Alpha Research.

Of those polled 65 percent say that the economic situation in Bulgaria is worsening, while 53 percent, or every second Bulgarian, considers his family's economic situation to have deteriorated in 2011.

The poll also indicates that the majority of Bulgarians are definitely not optimistic either about the likelihood of foreign investment increasing, or easier access to bank credits for the country's businesses.

Every second Bulgarian expects the crisis to get worse, with 45 percent anticipating delays or failures in the payment of their wages, pensions and social benefits. 40 percent fear higher inflation, 37 percent expect tax hikes, and 30 percent foresee interest rates increases.

Their pessimism has a direct impact on Bulgarians' spending habits as well. About 37 percent do not spend anything beyond what is absolutely necessary, while 47 percent try to spend as much as they can, fearing inflation will render any savings they have useless.

Property prices in Bulgaria will continue to fall, experts say, but it is difficult to predict whether the downward trend will be gradual or whether the property market will crash like it did in 2009. In Sofia, the average price of residential property is 40 percent lower than in 2008, as buyers now typically pay 700-750 euros per square metre. The majority of properties are bought by first-time buyers, usually young families, who take out mortgages to buy small flats. Russians continue to be the chief purchasers of holiday properties.

The citizens' sentiments are reflected by what businesses think 2012 will bring. A survey by the Bulgarian Industrial Association established that 71 percent of the 500 business managers interviewed expect a deepening crisis in 2012. A percentage point less, 70 percent, said the business climate in 2011 was worse than in 2010. The gloominess is exacerbated by worsening rates of overdue debt, continuing need for skilled labour, bad work ethics, falling sales and the view that the government's anti-crisis policies, if any, have been "unsuccessful."

Just 7 percent said they say "improvements" in 2011, while 50 percents aid their companies performance had deteriorated. A quarter said they had to restructure their debts, and 8e percent said money owed to them was in arrears.

One in three said they would reduce staff further in 2012.

So how does Boyko Borisov's government fare in light of the gloomy economic forecasts for 2012?

Interestingly, it continues to enjoy the support of 20-28 percent of those Bulgarians who are otherwise very unhappy with their economic plight.

Bulgarians tend to trust the army (29 percent) and the Bulgarian National Bank (25 percent). Approval for Tsvetan Tsvetanov's police has fallen by 10 percent in a year – probably the result of the numerous botched police operations that as a rule fail to produce any meaningful prosecutions. The courts and the judicial system continue to be hugely unpopular. Sadly for a young democracy such as Bulgaria, just 8 percent trust the parliamentary institution.

The absence of a credible political opposition and independent media, coupled with the increasing manifestation of a dangerous Russian-style concentration of political and economic power, means GERB is likely to continue to dominate Bulgarian political life in 2012.

Issue 65

BULGARIA ECONOMY

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CRISIS IN PICTURES

DimanaT — Sat, 01 Jan 2011 13:20:52 +0000

CRISIS IN PICTURES

text and photography by Anthony Georgieff

DimanaT Sat, 01/01/2011 - 15:20

The government is saying that the economic crisis has ended. But a picture is worth more than a thousand words

In the third quarter of 2010 the average monthly income of an adult member of a family in Bulgaria decreased by 2.2 percent on a year earlier.

At the moment it is 932 leva, or 466 euros, according to the National Statistical Institute.

80.7 percent of the typical family income was generated by salaries and pensions.

Salaries accounted for 467 leva, or 233.5 euros, of the average income of an adult household member in Bulgaria in the third quarter of 2010. This is a 4.9 decrease on a year earlier.

The income generated through independent economic activity amounted to 65 leva per family member, or just 7 percent of the average family income.

The grand total of spending money per family member in the third quarter amounted to 845 leva, or 422.5 euros, per month; a decrease of 5.3 percent on a year earlier.

51.7 percent of the total spending by an average Bulgarian went on electricity bills, fuel and water. Food and non-alcoholic beverages cost 317 leva, or 158.5 euros, per family member.

Spending on health care increased by 7.2 percent and amounted to 43 leva, or 27.5 euros, per family member. The average Bulgarian spent 23 leva, or 11.5 euros, per month on shoes and clothing; a decrease of 10.7 percent on a year earlier.

Issue 51-52

BULGARIA ECONOMY

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THE CRISIS IN FIGURES

DimanaT — Thu, 10 Dec 2009 12:58:54 +0000

THE CRISIS IN FIGURES

by Dimana Trankova

DimanaT Thu, 12/10/2009 - 14:58

The Bulgarians are optimistic about their economic future - for political reasons

The crisis was already a fact in Bulgaria at the beginning of 2009, but the owner of an accountancy firm in Gorna Oryahovitsa would deny it even more vehemently than then Prime Minister Sergey Stanishev. "I can't understand what crisis they're talking about. I have enough work, clients are paying their bills and the mince in the shop is cheaper," he said. A journalist from Varna shared his opinion: "I am earning more than ever. If this is a crunch, I hope it goes on forever." A laboratory assistant was a bit more restrained: "I don't feel the crisis, probably because I have a state-paid job. My salary is small, about 400 leva a month, but I receive it regularly."

All three of them hoped, rather naively, that if the crisis turned out to be real, the banks that had given them loans would go bankrupt. The series of "planned" insolvencies of banks in the mid-1990s in Bulgaria, which robbed millions of people of their savings and wiped out the debts of creditors, gave many citizens the wrong idea that such things often happen in democratic countries.

A year later, it is only the laboratory assistant who has not experienced the crisis personally. The accountant does have clients, but they pay their bills increasingly infrequently because of their own financial difficulties. The Varna journalist is unemployed.

Strangely enough, this grim picture is at odds with the results of the regular Macro Watch poll from the Open Society Institute. In October 2009, Bulgarians were more optimistic about their economic development than they had been a year earlier, when Stanishev's government had declared the country "an island of stability." The optimists had increased three-fold compared to March 2009, when only 11 percent believed that the economic situation would change. In October 2008, pessimists amounted to 50 percent, compared to 60 percent in March 2009 and about 40 percent in October 2009.

At the same time, 14 percent of those interviewed in October 2009 were unemployed. A year earlier, unemployment amounted to 8 percent, and in March 2009 – to 10 percent. The people who were most affected by the crisis were in the 46-60 age group (over 60 percent) and the 31 to 45 age group (54 percent), while pensioners suffered from its effects the least (26 percent). The most severely affected social group was that of the unemployed: 75 percent, compared to only 26 percent of the retired pensioners.

Why are the Bulgarians optimists? "Many of them view the economic crisis as a political one," says Georgi Stoychev, executive director of the Open Society Institute. "The parliamentary election and the formation of the new government in the summer generated expectations of an improvement in the general economic situation." According to the survey, the supporters of GERB, or Citizens for European Development of Bulgaria, are the most optimistic (40 percent). Just 9 percent of the BSP, or Bulgarian Socialist Party, voters and 10 percent of the DPS, or Movement for Rights and Freedoms, two of the participants in the previous tripartite government, share their opinion.

"However, Bulgarians have much more cautious expectations regarding their household finances. In October 2009, the optimists were 16 percent, which is half the number of optimists regarding the economy as a whole," Stoychev says.

Traditionally, at times of crises, winter is the hardest season. Heating bills become the main topic of conversation and those Bulgarians who have relatives in the provinces begin hoarding zimnina, or winter supplies, such as potatoes, preserves, pickles, wine and rakiya, as early as the summer. Bulgarians even have special idioms reflecting the fear of the approaching winter. "To take hold of the green" means "to survive." It refers to the time when the first fresh salads and spinach appear in the gardens and it becomes clear that the severe winter is over. "Lukanov's Winter" (1990-1991) and "Videnov's Winter" (1996-1997), named after the Socialist prime ministers who governed the country during those periods, and the dearth of basic goods available then, have become synonymous with disaster.

Will this winter have an effect on this unexpected Bulgarian optimism? "I expect that pessimism will go up again, and not only due to the season," Stoychev says. "In winter, the crisis will move on from the wider economy to the public finances. In 2009, it was mainly businesses and those in active employment who suffered. In 2010, the crisis will also affect those whose income comes from the state budget, including pensioners and university students."

The 2010 budget will be tougher. Healthcare and education will be reduced by 240 million leva and only infrastructure projects, tourism and pensioners will see an increase.

Public trust in the executive branch increased from 16 percent in February 2008 (when, for Bulgarians, the crisis was something happening to other people) to nearly 30 percent in October 2009. Therefore, for Boyko Borisov's government, "crisis" may actually become synonymous "opportunity" – the opportunity to carry out stringent reforms while retaining public trust.

On the other hand, the government is a minority one. "Its stability is due to its popularity, so I don't expect it will carry out reforms at any cost," Stoychev says. "Boyko Borisov will probably carry out reforms at an acceptable political cost. This increases the risk of postponing or abandoning many reforms halfway if they provoke negative public reactions."

"The government has to move from a policy of anti-crisis measures to a policy of structural reforms," Stoychev claims. The aim of the anti-crisis measures or 'stimulating packages' that we have seen in Bulgaria and in the rest of the world means that we continue living as we have been so far. The aim of the structural reforms is that we begin living in a different way. In the first case, we are trying to survive the crisis and, in the second, to make use of it."

Where are reforms most pressing? "Even without the crisis, the main sectors that are in need of restructuring are healthcare, education and justice," Stoychev says. "The crisis can be used as a justification for reforms – or as an excuse not to make them. In a perfect scenario, Bulgaria will have popular reformists who make unpopular reforms. In the worst case, it will be ruled by unpopular reformists who make only popular reforms."

However, the government of Boyko Borisov, seen by many Bulgarians as very charismatic, can't compare with the banking system in terms of public trust. In October 2009, nearly 45 percent of the Bulgarians who took part in the Open Society poll expressed confidence in it. A year earlier, only 27 percent had. What did the banking sector do to deserve it? "It has been completely reformed over the past 10 years and is now largely part of the EU banking system," Stoychev says. "Bulgarian banks are European banks, so the measures to protect the EU banking system had a positive effect on the Bulgarian one too. The stability of the currency board and the trust in the fixed rate of the leva to the euro has added to this trust. This is why Bulgaria has avoided the fluctuations and instability that other countries in Central and Eastern Europe experienced in 2009."

Not all comparisons with the situation in other EU countries are so positive though. According to Eurobarometer, Bulgarians find it more difficult to meet their expenses than other EU countries. "Only 18 percent have no problem paying their bills and loans, compared to 80 percent in Denmark, 47 percent in the UK and an average of 45 percent in the EU," Stoychev says. Eurobarometer confirms the optimistic views reported by the Open Society: 18 percent of Bulgarians are optimistic, compared to an average of 16 percent in the EU. 38 percent of Bulgarians do not expect to see any changes, while the EU average is 55 percent. Pessimism grows when Bulgarians are asked about their family budget expectations: 35 percent of them are pessimists, compared to an EU average of 26 percent.

Has the crisis influenced the attitude of Bulgarians to the EU? According to the Open Society poll, the answer tends to be a no. "Bulgarians traditionally trust European institutions three times more than the domestic ones. Neither the crisis nor the new government have changed this," Stoychev says. "The picture is relatively steady regarding the adoption of the euro – about 50 percent are for introducing the euro, in one way or another, while about 30 percent are against it. The crisis has not created pressure for an urgent change in the monetary regime. As a whole, the public prefers to enter the Eurozone via the official way, by meeting the membership criteria, and not by unilateral euroisation," Stoychev adds.

Issue 39-40

BULGARIA ECONOMY

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AT A TIME OF CRISIS

DimanaT — Fri, 06 Nov 2009 11:05:32 +0000

AT A TIME OF CRISIS

by Dimana Trankova; photography by Anthony Georgieff

DimanaT Fri, 11/06/2009 - 13:05

Reduce expenditure, invest in people and adopt a careful fiscal policy, says the New Reform Agenda of the New EU Member States International Conference in Sofia

Rays of hope have started to peep through the cloud-covered economic horizon – even in the new EU member states. Poland has managed to avoid going into recession. The Baltic states, which were on the verge of collapse until recently, have recorded a slight but encouraging restoration of productivity. The European Commission included Estonia and Bulgaria in the top five EU countries with the greatest financial stability.

But the devil is in the details. Everybody knows that when the global economic crisis ends, everything will be different, but nobody can be certain how exactly things will change. One of the biggest questions concerns those EU countries which entered the union in the expansions of 2004 and 2007. For them, the crisis may continue, despite the encouraging news. Having shaken off the restrictions of Communism only 20 years ago, they are now facing a difficult task. They have to continue with reforms in the areas of education, social policy and healthcare. Since the EU considered these areas a matter of national policy rather than general policy, they were not paid particular attention during the pre-accession period. Now, like all the other countries, the new member states have to deal with the crisis too and when they emerge from it, they will have to adapt to the new realities – whatever they may be.

Perhaps the new EU member states can prove the aptness of the cliché that a crisis is just an opportunity. All they have to do is act quickly and sensibly. The New Reform Agenda of the New EU Member States International Conference focused on the risks they are facing and what the best model for action might be.

The event, organised by the European Policy Initiative, a programme of the Open Society Institute think tank, and the World Bank in Sofia, brought together delegates from all over Europe, including World Bank experts and three Bulgarian ministers.

One of the main dangers for the new member states, especially those experiencing recession, is that their development may slow down relative to that of the older member states, said Tonny Lybek, IMF Resident Representative for Bulgaria and Romania. Before the crisis started, "new EU member states" and "rapid economic growth" had become nearly synonymous. The positive state of the world economy boosted their exports and western banks quickly entered the local markets. Excited by the prospect of joining the EU, their governments implemented liberal economic policies. However, when the crisis struck, the foundation of the previous growth turned into a foundation for economic problems. The budget deficit went up and the extent of the involvement of the failing western banks hit local economies. Exports and foreign investment reduced sharply and the GDP began to fall – in the case of the Baltic republics, by over 10 percent. Economic difficulties are a source of real danger for the new member states: they could slow down the necessary reforms. According to Marek Dabrowski, President of the Centre for Social and Economic Research, this may lead to another danger. The EU may split into two camps: the rich and their poor relatives. Florian Fichtl, country manager of Sofia's World Bank office, thinks that the new member states will need much longer to recover from the crisis than the old ones.

Despite the encouraging signs of stabilisation in the countries of the region, their governments, citizens and entrepreneurs are facing incredible difficulties. Unemployment is on the increase and so, as a result, is social expenditure. Private companies and individuals find it increasingly difficult to repay their bank loans and access to credit is limited. Banks are also at a disadvantage because it is almost imposwsible to rely on capital inflows from abroad.

Fichtl's analysis was confirmed by Krassimir Popov, deputy minister of labour and social policy. He announced at the conference that the number of unemployed had risen by 219,000 between January and September 2009. Another 100,000 people will join them by May 2010, most coming from the sector that until recently was among the pillars of the country's economic growth: the construction industry.

Unemployment has risen from 6.5 to 8.03 percent since the beginning of the year and, what is more, its composition has visibly changed over the past 18 months. During the period of economic growth most of those on the dole were long-term unemployed but today the largest group is those who have recently lost their jobs due to the economic crisis.

Fichtl recommends several strategies that governments can pursue. Public expenditure should be reduced and financial stability should become the primary objective. The good news for Bulgaria in this respect is the currency board. The exchange rate of the Bulgarian lev was fixed to the German mark (and afterwards to the euro) in 1997, following the catastrophic hyperinflation and economic crisis resulting from the period of Zhan Videnov's Socialist government (1995-1997). Only a year ago there were ongoing debates about whether to terminate the currency board. "When there is a crisis, the lack of an independent currency is not a disadvantage," Kalin Hristov, who became vice governor of the Bulgarian National Bank a week later, said at the conference. Georgi Angelov, senior economist of the Open Society Institute, argued that Bulgaria will soon meet all the criteria for adopting the euro and should definitely apply for accession to ERM2, the financial mechanism known as "the waiting room for the euro zone."

Minister of Finance Simeon Djankov also took part in the conference, where he presented his views on the country's immediate future. "We, the Bulgarians, have to define our national strategy for development for the next five or 10 years. What has so far impeded Bulgaria's further advancement is not the lack of administrative capacity but the absence of political will for reform," Djankov said. Among the problems in this area, Djankov pointed to the symbiosis between organised crime and some politicians and the reluctance to reform certain sectors, such as customs and energy.

He also named the priority areas for the present government: education, healthcare, infrastructure and the protection of the environment.

Djankov, who announced that Bulgaria may apply next week for accession to ERM2 in the spring of 2010, attracted everybody's attention at the conference with a bold idea. He said that the government may withdraw part of Bulgaria's fiscal reserve from the Bulgarian National Bank and deposit it in commercial banks at higher interest rates. His suggestion was received negatively by the other participants, and a day later the Prime Minister Boyko Borisov rejected emphatically such possibility.

Economic reforms are only half the answer to the question of what we should do in a time of crisis. Social policy and investment in people are equally important. Krassimir Popov said that the protection of people facing redundancy will be a priority of the government. Minister of Education Yordanka Fandakova stressed the importance of education. "Investment in education is not a social activity. Investment in education is essentially a counter-crisis measure," she argued.

One of the main problems of the Bulgarian education system at present – and it is something that has grown over the years – is the utter discrepancy between what schools and universities teach and what businesses need in terms of specialists. Fandakova's ministry is starting work on a programme aimed at reforming vocational schools so that they can respond to the real needs of industry.

Such statements provide a ray of hope. But, as the Bulgarian saying goes, "chicks are counted in the autumn." Similarly, the success of the anti- crisis measures can be evaluated only after the crisis ends.

Issue 38

BULGARIA ECONOMY

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BRITS GONE HOME

DimanaT — Mon, 05 Oct 2009 09:10:44 +0000

BRITS GONE HOME

by Stanislava Ciurinskiene

DimanaT Mon, 10/05/2009 - 12:10

With the economic crisis raging, Britons wishing to sell their Bulgarian properties outnumber those wishing to buy

At first, they stopped buying. Then it got worse - they started selling. Yes, it seems the British have deserted the Bulgarian property market and the Bulgarians are taking it very personally. The situation is grim all over the country, even in top spots and villages regarded as "British" for years.

DID WE SEE IT COMING?

The widespread myth that it was mainly British buyers that made the Bulgarian property boom happen is far-fetched, but not completely without foundation. At the beginning of the 2000s, they spotted Bulgaria as a potentially profitable investment destination and, more importantly, a cheap place to live. Those first buyers chose mainly rural properties and relocated to villages, where the purchasing power of their pensions was many times greater than in the UK. Then they spread the word about this sometimes sunny country with stunning landscapes and cheap properties, and their compatriots started arriving. Some bought holiday homes they would rarely use, some even purchased online without even having seen their properties, some did come to settle. Others saw an excellent business opportunity and opened real estate agencies themselves. The British economy was strong and the pound was high and, while those who could afford to still invested in France, Italy or Spain, the less wealthy were buying up Bulgaria. Small investors were happy, but to the UK economy it meant a major outflow of capital.

BOOM AND BUST

The credit crunch and the global economic downturn may have been foretold, but they still took both the British and the locals involved in the Bulgarian property boom by surprise. As more people in the UK felt the effects of the crisis they started to ditch some of the luxuries they could no longer afford to keep, like second homes abroad. Such properties were traditionally viewed as an expendable asset that could easily be used to realise the capital needed to make it through tough times. But what happens when too many people have the same survival plan at the same time, especially in a volatile economic situation? A fall in prices is the least of the problem. The real and present danger is oversupply on the secondary market, making it difficult or even impossible to sell and so access that vital capital.

WHEN DISASTER STRIKES

Right now, things are not looking rosy. Most British-owned real estate agencies, especially on the Black Sea and in the major winter resorts, have long since closed down. Bad property management and a sharp drop in tourist numbers means that only about 30 percent of all British holiday homes are rented out. In Bansko – the most popular Bulgarian winter resort for the British – the percentage is even smaller, approximately a quarter of the 2,500 apartments available. Neither at the sea nor in the mountains have buyers received the promised rental incomes. For that, however, they can largely blame their fellow citizens. While Bulgarian brokers "only" promised 10 percent return on rental incomes (more realistic figures were 5 to 7 percent), their British colleagues "guaranteed" up to 25 percent.

The really bad news is that those who, riding the euphoria wave, purchased online without seeing the property first and then ran into difficulties with the developer or the vendor will never get their money back. Nobody can tell what will happen to those who bought off-plan and whose building projects were subsequently halted due to financial or planning difficulties.

In regions known as British colonies, like Avren near Varna, hardly a single property has been sold in the last year, though the mayor recently reported a few new deals with Scottish buyers. The picture is not so bleak everywhere, though. In Veliko Turnovo region, there have been a good number of British-selling-to-Bulgarians deals, with the sellers making at least 30 percent profit.

THE SILVER LINING

Not all parties are losing out. The fire-sale hunters, already invading the market, may do well enough. They are buying up properties from owners who are compelled by banks or other unfortunate circumstances to cash in their overseas investments urgently. Often, these "real estate vultures" acquire excellent properties for 50 percent of their real value, or even less. This summer, a British investment group bought up more than a hundred apartments in a popular winter resort for about 200 euros per sq. m. The sellers were… British, of course.

THE END IN SIGHT?

Now the Bulgarians blame themselves for "scaring the Brits away." Every local property expert will tell you it was the greedy developers who destroyed the property market by creating oversupply and spoiling the natural surroundings. There is much truth in what they say, but even so, the British are selling up in France, Spain, Greece and any other popular investment destination you can think of. The crisis has not spared any market, but could the end be in sight?

THE BRITISH LIGHT AT THE END OF THE BULGARIAN TUNNEL

Just as it seemed the British–Bulgarian property affair was officially over, local real estate agents announced last month that the fugitives are back! Ironically enough, they are now looking for exactly the same type of properties they were interested in when they first set foot in the country: namely, very cheap rural properties in dire need of renovation for an average price of 4–5,000 euros. The latest new/old areas of interest are villages around Elhovo, Pleven and Montana. The profile of the average British client for this type of property, however, has changed. While before they were usually retired couples, now there is quite a good number of young buyers.

Holiday homes are no longer completely out of favour either. They have regained popularity due to their almost ridiculous prices, similar to those at the beginning of the property boom. Recently, brokers reported British citizens were buying up dozens of apartments around Sozopol, in the southern Black Sea area. A large number of deals were concluded in the wider area of Sunny Beach, too, for an average price of 300–350 euros per sq. m. Usually, these buyers are ready to pay up to 25,000 euros for a fully finished apartment.

The Bulgarian property boom has come full circle. New deals are still more the exception rather than the rule and it is too early to be certain but it seems, for the British, that another circle may have begun.

Issue 37

BULGARIA ECONOMY

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THEN € NOW

DimanaT — Tue, 28 Jul 2009 09:21:32 +0000

THEN € NOW

by Dimana Trankova; photography by Anthony Georgieff

DimanaT Tue, 07/28/2009 - 12:21

Bulgaria missed a golden opportunity to join the common EU currency, but at the height of the economic crisis needs to get in the fast lane to the euro

"The Bulgarian economy is stable." The words former Finance Minister Plamen Oresharski uttered in October 2008 seem more than just a little out of place a year later. The economic crisis is in full swing and, according to the most optimistic forecasts, will reach its peak from October to December 2009. As a result of the generous spending indulged in from the valuable budget surplus that Bulgaria accumulated over the years when foreign investment flowed in, the picture is far from rosy. The IMF predicts a dramatic 7 percent drop in the country's GDP – compared to a 6 percent increase in 2008.

Against this catastrophic background, Simeon Djankov, even before he became finance minister in the Citizens for European Development of Bulgaria, or GERB, government, announced out of the blue: "In November Bulgaria will be ready to enter the ERM II." Prior to getting involved with Boyko Borisov's party, the 38-year-old was chief economist of the finance and private sector of the World Bank.

ERM II is not just one of those acronyms that bureaucratic Brussels loves so much. The European Exchange Rate Mechanism guarantees the smooth transition from the local to the common EU currency, a task that is best described by its informal name: the waiting room for euro adoption. Each country that wants to introduce the currency – and does not have the audacity of Montenegro and Kosovo to take this decision unilaterally – must have been in the ERM II for at least two consecutive years. During this time they have to meet five criteria. The inflation rate must not be more than 1.5 percentage points higher than the average of the three member states with the lowest inflation. The ratio of the annual government deficit to GDP must not exceed 3 percent. The ratio of gross government debt to GDP must not be over 60 percent. The nominal long-term interest rate must not be more than two percentage points higher than that of the three best performing member states. The exchange rate of the local currency to the euro must be stable.

Oresharski never supported the adoption of the euro. When Bulgaria acceded to the EU in 2007, he stated that the adoption of the common EU currency was not a priority. The country was supposed to enter the euro area in 2012 and the waiting room in 2010. In April 2009 Oresharski confirmed his opinion. The issue of entering the ERM II and adopting the euro is not a current priority under the existing economic circumstances, he told the IMF.

If Bulgaria did not dare to knock on the euro door in 2007–2008, when its economic growth bubble was soaring, how will it do it now? Djankov's promise may be interpreted as an internal publicity stunt rather than a serious assertion of a change in policy. But it would be wrong to view it from this perspective alone.

"What Djankov has formulated as a political intention is a view widely held by the expert community," comments Roumen Avramov, a programme director and economic researcher in the Centre for Liberal Strategies, and author of the recent summary report "Economic and Political Challenges of Acceding to the Euro Area in the Post-Lehman Brothers' World" written for the Open Society Institute, or OSI, a liberal think tank.

"Djankov shows that the new government will implement a strict pro-European policy. Economically, entering the ERM II will be a strong sign for the markets that Bulgaria is stable and has the support of the ECB and the EU," says Georgi Angelov, senior economist with the OSI.

Bulgaria operates under a currency board arrangement, introduced in 1997 due to the economic crisis and hyperinflation caused by the previous Socialist government. The Bulgarian lev was first pegged to the German mark, and after 2000 to the euro. The country's fiscal affairs have been governed by the IMF. So what is the difference between the board and the ERM II?

The IMF is a life-saving remedy in an emergency. It shows that the country can't manage by itself. The ERM II is a positive strategy. It shows that the country is stable, even in times of difficulty – and this will help it get outside support," Angelov says. Avramov agrees: "There are no minuses from entering the ERM II for economies with monetary councils, such as Bulgaria. The country has been living under conditions that are even stricter than those of the ERM II for 12 years." The Baltic countries are in a similar position. Lithuania, Latvia and Estonia have monetary authorities, but unlike Bulgaria, they are already in the waiting room. All these countries have agreed to guarantee their stability by keeping the currency board until the moment they enter the euro area.

Post 2007: the same statue propagates the virtues of the euro

Why isn't Bulgaria in the waiting room then?

"The country could have entered the ERM II and the euro area during its economic good times but it missed out. Now it will have to pay for this mistake, like the other countries in the region," Angelov says. "There was a time when all member states had approved the accession of the country to the ERM II. Only the ECB was to give its consent. At that point, the government got scared of the ECB and withdrew its attempt to enter the waiting room."

Avramov is even more categorical: "From a purely economic point of view, Bulgaria was completely ready for the ERM II as early as 1 January 2007." Back then, it met four out of the five euro convergence criteria. The only one it did not meet was the inflation rate.

However, Bulgaria did not follow in the footsteps of Slovenia, which joined the EU and the ERM II in 2004 and adopted the euro in 2007. Slovakia also entered the euro area in 2009 and is now reaping the rewards of its efforts. "Its interest rate is lower than in the countries outside the euro area and nobody thinks that it will have to sign an agreement for funding with the IMF, something that the rest could have to do," Angelov says.

Bulgaria had bargaining chips which, if used sensibly, would have got it into the ERM II two years ago. "Bulgaria was one of the first member states to ratify the Lisbon Treaty. This should not have happened before entering the waiting room," Angelov thinks. "The government could have defended the view that the country must obtain its ERM II membership first and sign the treaty only afterwards."

They missed their chance. "For the first two and a half years of its EU membership Bulgaria did not manage to convince the other member states and the ECB that it was ready to enter the ERM II. To some extent, this was due to a lack of effort. Then came the world financial crunch and the severe criticism over the absorption of EU funds, the judicial system and crime. It is hard to expect a benevolent attitude to a country that the EU does not trust and has suspended its EU funding for corruption," Angelov says.

"There are not strict criteria to enter the ERM II – and this gives diplomacy room for action and allows for purely political considerations and ambiguous interpretations," Avramov comments. "The ECB has the final say at the 'entrance' to the ERM II, but has no veto right at the 'exit.' Bulgaria allowed itself to be drawn into this game with indistinct rules, where its small chances were gambled away by a weak, faceless government."

How can GERB's government change things? "Not only should the new government have a good macroeconomic policy, but it should also win the trust of EU institutions. They have to see tangible progress regarding the absorption of EU funds, the judicial system, corruption and organised crime," Angelov says. "Paradoxically, the role of non-economic factors will be nearly as important for Bulgaria's entry into the ERM II as economic policy."

"Unfortunately, a bad reputation is hard to lose," Avramov says. "If the government does not take advantage of its potential, we'll quickly find ourselves back at square one."

Bulgaria is not the only new EU member state seeking a safe harbour from economic instability in the euro area. Avramov's report shows that this is a common trend for the countries of the former Eastern bloc. Only two of them have adopted the euro: Slovakia and Slovenia. The Baltic states are in the ERM II while Bulgaria, Poland, Hungary, the Czech Republic and Romania have delayed their accession.

All of them, apart from Bulgaria, wanted to take maximum advantage of the floating exchange rate of their national currencies to the euro to achieve their main aim: attracting foreign investment.

But when the crisis struck, as the report points out, investment stopped and the countries experienced a severe shock. The euro area suddenly became attractive. Poland is a typical case. Until 2008 the country did not show any serious signs of intending to give up the zloty. However, the crisis made it set itself the overambitious task of introducing the euro in 2011. Later, the date was put off until 2012, as Avramov relates in his report. At the beginning of 2009, the countries in this group focused on the adoption of the euro in 2012–2014.

They have to "hurry slowly" on the road to this goal. The EU will be the last institution to allow a precipitate enlargement of the euro area. The union has powerful bargaining chips, such as the funds.

It may be that the rock of EU bureaucracy will turn out to be stronger than the economic storm, but Avramov does not agree with such simplifications. "This is not a matter of bureaucracy. The EU is a conservative institutional union, but its boldest creation is the euro and it is particularly jealous of it. At present, the situation is schizophrenic. The crisis has made the euro attractive but at the same time driven it further away from those that are not using it.

On the one hand, economic logic recommends a faster homogenisation of the EU. On the other, rules should not be disregarded even in the most revolutionary situation. The principles of equal treatment of the countries in the euro area and those outside it are not empty rhetoric. The fear of the negative repercussions that the accession of unprepared economies would have on the euro is not entirely groundless."

The forecast is not optimistic: "In the near future, the chances of relaxing or changing the mechanisms for entering the euro area are zero," Avramov says. The applicant countries have to assess their decision carefully. "The countries with a floating exchange rate doubt whether they will be able to keep their currency within the permitted fluctuation band. In this respect, risks have increased dramatically over the past few months," Avramov says. The crisis has also affected the way that countries meet the euro convergence criteria.

"To some extent, it is easier to reach the required inflation rate, but most countries have moved away from the budget deficit and long-term interest rate standards," Avramov says.

As things are, Djankov won't have an easy task. The new government has to avail itself of the small advantage it has: the very fact that it is new and has nothing to do with Stanishev's hesitant cabinet.

"November could even be regarded as too late to enter the ERM II. They can do what is necessary to achieve this as early as September. In August, there is nobody in Brussels anyway," Avramov says.

Issue 35-36

BULGARIA ECONOMY

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BITING HARDER

DimanaT — Fri, 10 Jul 2009 05:01:45 +0000

BITING HARDER

by Mediapool

DimanaT Fri, 07/10/2009 - 08:01

Every second person in Bulgaria is affected by the crisis, while 28 percent of people with bank loans find it difficult to keep up payments

While last autumn the prevailing opinion of people in this country was that the economic crisis did not have a direct effect on them, their view is now completely different. Nearly half of them say that the crisis has entered their homes, in one way or another. This is what a series of surveys conducted by the Open Society Institute show about the impact of the country's economic situation on Bulgaria's population.

In last October's poll, one in three respondents defined the crunch as something abstract that would have a negative effect on the Bulgarian economy as a whole. Only 26 percent were afraid they would be affected personally. By March, 45 percent felt personally affected, rising to 47 percent two months later.

Those who have suffered from the crisis point out that its strongest effect is the reduction or freezing of their salaries – 35 percent of those interviewed. The second largest negative effect is the rise in outgoings to repay their debts (31 percent).

A considerable number of the self-employed have seen their income dwindle significantly – 17 percent. These include designers, lawyers, small businessmen, builders, financial consultants, merchants and so on.

The unfavourable economic situation has led to both a reduction in working hours and a pay cut for 13 percent. 11 percent have had to take compulsory leave and, because of fear of redundancy or dismissal, 11 percent have worked extra hours unpaid. Compulsory unpaid overtime is a protective reaction by employers, and the fear of losing their jobs makes employees and contract workers agree to the deteriorating conditions.

Nine percent of those interviewed feel the crisis in rejected loan applications. Eight percent of those affected had already been made redundant. For many, multiple negative effects are interrelated because, for example, a drop in income leads to a loan rejection.

The Open Society survey also shows the profile of those most affected by the crisis.

They are middle-aged people with average educational qualifications and an average income (400-600 leva per head in the household). The income of those with higher education and salaries above the average for the country has also fallen.

While in March it was mainly Roma who felt most affected by the crisis, two months later the survey indicates a considerable increase of affected ethnic Turks. This is probably because of a slowdown in construction projects. There are now fewer jobs in this sector and construction workers have normally been hired from predominantly Turkish areas.

Despite the crisis, people's fears related to their personal well-being are not dominated by the state of their finances. People are most afraid that life will become more insecure as a whole (84 percent); they are afraid of an increase in crime (79 percent), and only after that of a drop in their income (71 percent) and unemployment (58 percent).

Nearly half of the respondents said they were worried their children would emigrate. One in three people is apprehensive about ethnic conflicts or losing their business. Many of those interviewed gave more than one reason for their fear.

The survey of the Open Society Institute reveals that the full consequences of the loan expansion are yet to be felt and will result in stagnating incomes and a rising unemployment rate. One in every three (35 percent) working Bulgarians has taken out a bank loan or pays instalments for goods bought on hire purchase. A third of them have no problem paying the instalments, but 28 percent find it difficult to do so, while 20 percent use half of their income to service loans.

Issue 34

BULGARIA ECONOMY

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GO GREEN, EVERGREEN

DimanaT — Wed, 01 Apr 2009 18:13:45 +0000

GO GREEN, EVERGREEN

by Atanas Garov

DimanaT Wed, 04/01/2009 - 21:13

Caring for the environment can help property developers succeed in a financial crisis

The commercial real estate market in Bulgaria is at a crossroads. All of the three commercial sectors – offices, retail and industrial – have felt the impact of the global economic downturn that started to affect Bulgaria during the last months of 2008 and continues this year.

The slowdown has hit quite differently across the various sub-segments, depending on the stages of development. The question now is how we choose to manage the situation, and what will take off when the light changes to green.

Currently the office sector is the most mature and was set for a steady growth. Now, however, it is characterised by a situation in which supply and demand are moving in opposite directions.

Demand has fallen in the second half of 2008 and doesn't appear to be picking up in 2009. The industrial and logistical market, which has been a late bloomer, is only moderately affected by the financial crisis.

The worst impact has been on the supply side, where some projects experienced delays due to financing issues, while others were simply put on hold. In general the market remains undersupplied and thus ripe for new, well-conceived projects. Retail, especially when speaking about shopping malls, has witnessed a return to sanity, with only viable projects progressing and a looming over saturation avoided.

History teaches us that, regardless of the length and the depth of a crisis, it eventually fades. That is why real estate developers have two choices now. They can view this as a temporary setback, wait for the whole thing to blow over, and then reintroduce schemes that were put on hold due to lack of financing, expecting to proceed with business-as-usual and being successful with yesterday's product for tomorrow's market.

The alternative is to spend time reflecting on the characteristics of future demand and start developing products that meet those demands.

Savvy developers will choose the latter option. They will know that if you continue to do what you have always done, you'll get what you've always got. And, at times like these, it is an approach hardly worth trying.

The key to being successful in the post-crisis world of real estate is differentiation. Differentiate or die has long been the mantra in fast moving consumer goods. There is no reason we shouldn't apply this approach to the real estate sector also. Research shows that products with a clear (demand-driven) differentiator are more resilient to fluctuations in the economy – and perform better overall.

Using green technology is an example of a characteristic destined to become an important factor in tomorrow's properties. The trend towards green buildings is a non-reversible process, regardless of the development in energy prices. The recent fall in oil prices has solely been driven by weak demand – once that bounces back, energy prices will start to rise again. Occupiers and investors care about operating costs as well as building value and return-on-investment. And all these factors are much more attractive in green buildings; in fact, they are evergreen.

And let's not forget the idea of corporate governance. This principle has been avidly discussed and promoted but, as the current financial situation demonstrates, not widely implemented. It is highly likely that in the new market situation, which comes out of the mess we're currently in, the principles of corporate governance will become much more important, and thus increase the demand for real estate that at least attempts to minimise the environmental impact.

In essence, the recipe for success has survived all fluctuations in any market. The successful developers will not be those who sit and wait for the crisis to pass, but those who are already making plans for the future. It is going to be interesting to see who they are.

*Atanas Garov is the managing director of Colliers International in Bulgaria

Issue 31

BULGARIA ECONOMY