Bulgaria to avoid staging Greek tragedy

By bne IntelliNews May 13, 2010

Nadia Damon in Sofia -

What a difference debt makes. When once it was clamouring to keep company with Greece, these days Bulgaria is doing its utmost to distance itself from any unfavourable comparisons that may lead to it being seen as next in line for a bailout.

Clearly, the country has its work cut out. Even before the ink had dried on the latest massive loan agreement for Greece in May, Thomas Mirow, president of the European Bank for Reconstruction and Development, made a point of highlighting the possible effects of Greece's troubles when he warned that along with Romania and Serbia, Bulgaria faces the risk of contagion by virtue of the fact that there are a number of Greek banks operating there.

Approximately one-third of Bulgarian banks are majority-owned by Greek banks, although the fact they're still profitable has done little to ease worries. Mirow went on to say that so far there's been no evidence of any major effect - even adding that "Greek banking subsidiaries have behaved well" - but his additional warnings about the threat that Greece's troubles pose to investment and exports in the Balkans proved enough to prompt headlines such as the BBC's "South East Europe vulnerable to Greek contagion."

Ilian Vassilev, chairman of consultancy Deloitte Bulgaria, says that instability in Greece inevitably creates a negative perception about the region as a whole, with many investors not venturing into the fine print of specific countries and markets. He makes the point that while levels of foreign direct investment (FDI) in Bulgaria in 2009 were 53.3% down on the previous year as a result of the global economic crisis, Greece remains the largest investor (making up 27.3% of the country's total), followed by the UK (19.6%), and Germany (11.6%). "Many Greek companies continue to enjoy very profitable operations in Bulgaria," Vassilev insists, "and we expect Greek business to continue to show interest in the opportunities available in the country. The Bulgarian leg of this business might prove to be an important asset balancing home-based concerns."

Tsvetoslav Tsachev, head of research at Sofia-based investment firm Elana Trading, is equally confident that Bulgaria won't be hit hard by the crisis - and claims the drop in FDI from Greece is nothing new, given that the decline dates back as far back as the fourth quarter of 2008. "The Greek economy will contract further due to the forthcoming budget cuts," he concedes, "so the positive impact on Bulgaria will remain limited. However, the data for exports to Greece has confirmed the lack of a sizable effect on a yearly basis. The decline is much larger when compared to 2008, but since Greece's debt problem [came to light], no further reduction has been noticed."

Tsachev adds that Bulgaria probably won't suffer any significant reduction in tourism either. "The bottom line is that the Greek crisis will have only a small effect on Bulgaria."

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While sovereign debt default is not one of the risks that Bulgaria faces right now, there is little doubt that the problems spilling out from Greece have prompted many to question the Bulgarian government's response to the downturn.

The cabinet's admission in April that its official estimate of the country's budget deficit for 2009 was too low at 1.9% of GDP and it was probably nearer 3.7% prompted widespread disquiet and heralded a host of anti-crisis measures, including cuts within the administration as well as luxury taxes - although a proposed hike in VAT was eventually abandoned. Vassilev believes the latter decision was the right one. "Government expenditure cuts are always a better options than raising taxes," he claims. "At the same time, it is too early to tell whether defensive policies will suffice in turbulent times without a proactive approach in identifying and promoting growth drivers."

As for the deficit itself, Vassilev insists the amendment holds little significance. "The current numbers reflect differences in accounting methods, on a cash versus accrual basis," he states. "The government follows fiscally conservative policies and the government debt/GDP stands at 15%."

For Tsachev, the budget cuts fall short of what is required for the long term and still don't address the problems of large government spending and low levels of efficiency within the administration. This "smoke" became "fire" for reports in May that claimed the International Monetary Fund (IMF) had described the Bulgarian government's approach as "risky" when it met with the leader of a Bulgarian opposition party, even though those reports were immediately quashed by the Fund, which insisted it agreed with the government on most issues.

Such support from international bodies like the IMF has proved invaluable over the years, according to Vassilev, who claims such long-term ties have made the financial situation in Bulgaria much more representative of that in Germany, rather than Greece. "Following the crash in 1997, Bulgaria has worked with the World Bank and the IMF to establish solid fiscal policies and rigid financial discipline," he explains. "A long-term currency board situation has led to fiscally conservative government policies for the past decade with most years featuring budget surpluses."

This peg to the euro continues to be commercially advantageous for Bulgaria, says Vassilev, because it reduces the currency risk and the political risk when it comes to investing in the country. "As far as options are concerned, they are always limited for a country out of the [European Monetary Union], as we do not have access to ECB funding and comparable access to capital markets."

Tsachev agrees: "The good news is that we don't need more options," he states. "The decline of GDP in Bulgaria was less severe than in Baltic countries and Greece. The industry will recover due to external demand and the rising US dollar will improve the terms of trade for many sectors, including mining, metallurgy, agriculture and machine building."

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