Business in the Balkans

An update on the Balkan state of Bulgaria.

Bulgaria, according to the World Bank, has undergone a significant transformation over the past three decades, moving from a highly centralised, planned economy to an open, market-based, upper-middle-income economy securely anchored in the European Union (EU).

“In its initial transition to a market economy, the country went through a decade of slow economic restructuring and growth, high indebtedness, and loss of savings,” the World Bank said in a statement.

“However, the advancement of structural reforms, starting in the late 1990s, the introduction of a currency board, and expectations of EU accession unleashed a decade of exceptionally high economic growth and improved living standards. Yet, some legacy issues from that early period remain and, along with the global economic crisis of 2008 and the pandemic-induced crisis in 2020, have undone some of the gains achieved during the high-growth period.

“The long-term structural challenges facing Bulgaria include negative demographic trends, coupled with institutional and governance weaknesses. Strengthening institutions together with improved efficiency of public service delivery will support private sector expansion unlocking inclusive growth and shared prosperity.
“High rates of inequality of opportunity limit access to key public services, constraining the ability of individuals to escape poverty and thus leading to persistently high-income inequality. Poverty and inequality are reinforced by inadequacies in the targeting, coverage, and generosity of the social security system, limiting its role as a redistributive mechanism.”

The Bulgarian economy advanced by 3.3 per cent year-on-year in the third quarter of 2022, compared to initial estimates of 3.2 per cent, following a 4.6 per cent expansion in the previous three-month period. This, according to Trading Economics, marks the slowest growth since the first quarter of 2021 when the economy contracted, partly due to the spillover effects of the war in Ukraine.

Both household consumption (3.3 per cent vs 3.9 per cent in Q2) and government spending (7.7 per cent vs 10.3 per cent) slowed, while fixed investment continued to decrease (-6.1 per cent vs -9.5 per cent).

Meanwhile, net external demand contributed positively to growth, as exports (11.1 per cent vs 8.5 per cent in Q2) rose faster than imports (9.3 per cent vs 12.4 per cent in Q2). On a quarterly basis, Bulgaria’s GDP rose 0.6 per cent, in line with the preliminary estimate, slowing from an upwardly revised 0.8 per cent growth in the second quarter.

Meanwhile, industrial output growth in Bulgaria eased to 5.7 per cent year-on-year in October 2022, down from a downwardly revised 10.7 per cent in the previous month. It was the softest growth since February 2021 as output declined sharply for electricity, gas, steam and air conditioning supply (-30 per cent vs 1.6 per cent). Output continued to accelerate for manufacturing (14.2 per cent vs 14 per cent) while output fell at a softer pace for mining and quarrying (-2.1 per cent vs -2.4 per cent). Compared to the previous month, industrial production declined 2.0 per cent, after a revised 2.6 per cent fall in September.

Analysts at the World Bank reported that growth deceleration is forecast to continue in 2023, in line with global and EU trends. Going forward, reforms and investment under the National Recovery and Resilience Plan and the EU Multiannual Financial Framework will help sustain growth.

Rising food and energy prices continue to put pressure on poorer Bulgarians who spend a disproportionately high share of their income on these necessities. Poverty is projected to remain relatively unchanged at 6.7 per cent in 2023, though downside risks are likely to persist.

At the time of writing, the Council of Ministers of the Republic of Bulgaria released a statement on the Caretaker Government’s legacy.

“Our legacy to the successor government is: Crises have been resolved; institution-to-institution relations have been re-established; a good dialogue has been maintained with citizens; and the belief that the governance of a state is an open and transparent exercise,” said Prime Minister of Bulgaria, Galab Donev, at the opening of the cabinet day.

“Often sociologists say about us that none of the Caretaker Government members is particularly outshining. This is because we work as a team. Our cabinet consists of executives, not of actors. We are not acting on a stage, we are exercising our prerogatives in compliance with the Constitution and the laws of the country.”

National recovery and resilience
Donev wrote a letter to the President of the European Commission, Ursula von der Leyen, to express gratitude to her for her high assessment of the quality of Bulgaria’s National Recovery and Resilience Plan (RRP) and of the progress achieved in its fulfilment. The Prime Minister thanked on behalf of the Government and on his personal behalf in response to the Commission President’s letter from a week before where von der Leyen congratulated the Bulgarian Government on its first successful steps to fulfill the RRP and informed about the first disbursement of 1.37 billion euros to Bulgaria.

In his exchange of letters with the President of the European Commission, Donev noted the Caretaker Government’s consistent effort and focus on the implementation of the next set of milestones and targets which include important steps in the areas of rule of law, anti-corruption measures, procedures regarding energy efficiency, as well as investments aimed at improving the social and healthcare sectors and many others.
Donev also confirmed the Bulgarian Government’s firm commitment to the full implementation of the National RRP and thanked von der Leyen for her assurance that as heretofore, the Bulgarian Government may count on beneficial collaboration with the European Commission.

This plan responds to the urgent need of fostering a strong recovery and making Bulgaria future ready. The reforms and investments in the plan will reportedly help Bulgaria become more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions.

The plan comprises 56 investments and 47 reforms. They will be supported by €6.27 billion in grants – 58.9 per cent of the plan will support climate objectives and 25.8 per cent of the plan will foster the digital transition.

The transformative impact of Bulgaria’s plan is the result of a strong combination of reforms and investments which address the specific challenges of Bulgaria. The reforms address bottlenecks to lasting and sustainable growth, while investments are targeted to address common European challenges by embracing the green and digital transitions, to strengthen economic and social resilience and the cohesion of the single market. In particular, Bulgaria’s plan will accelerate the decarbonisation of the energy sector, promote the large-scale deployment of digital infrastructure, including in rural areas, as well as support investments in improving the business environment, education and skills, research and innovation, social protection and healthcare. All reforms and investments have to be implemented within a tight time frame, as the Regulation on the Recovery and Resilience Facility foresees they have to be completed by August 2026.
The plan will foster economic growth and create jobs. It will lift Bulgaria’s gross domestic product by 1.9 per cent to 3.0 per cent by 2026. This boost to the economy will bring up to 36,000 citizens into jobs. Bulgaria will benefit significantly from the Recovery and Resilience Plans of other Member States, for instance through exports. These spill-over effects account for 0.6 percentage points of gross domestic product in 2026. This demonstrates the added value of joint and coordinated action at the European level.

International cooperation
Earlier this year a deal was signed where Bulgarian gas company, Bulgargaz, will receive access to the terminals and gas transportation infrastructure of the Turkish state-owned energy company, BOTAŞ.

“In the context of the severe energy crisis, with concerted efforts we can achieve much more, both for Bulgaria and Turkey, and for Europe as a whole,” said Donev.
The existence of a number of projects of common interest, according to Donev, can also be implemented within a short period of time, including cooperation in the construction and development of gas storage capacity, investments in renewable energy sources and increased capacity of the electric power transmission network as well as the transition to a carbon-neutral economy.

Meanwhile, it has come to light via several mainstream media sources, including Germany newspaper, WELT, that Bulgaria came to Kyiv’s aid in the early months of the Russia-Ukraine conflict through the covert supply of ammunition and diesel.
Kiril Petkov, former Prime Minister of Bulgaria, and his Finance Minister, Assen Vassilev, said their country provided 30 per cent of the Soviet-calibre ammunition Ukraine’s army needed during a crucial three-month period last spring, and at times 40 per cent of the diesel.

“Kiril Petkov has shown his integrity, and I will always be grateful to him for using all his political skill to find a solution,” Ukrainian Foreign Minister, Dmytro Kuleba, told WELT, adding that the Bulgarian leader “decided to be on the right side of history, and help us defend ourselves against a much stronger enemy.”

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