Since teetering on the edge of bankruptcy early this year amid expectations of being the world's first Brady bond defaulter, Bulgaria appears to be bouncing back. The turning point was the installation of a staunchly pro-reform government in April since when prices across Bulgarian debt markets have rocketed.
Lev denominated T-bills, as well as the three Bradys - discs, flirbs and IABs - have all risen by over 50% making them star performers in the universe of emerging market debt. The lev, which once free fell to 3,300 to the dollar, has stabilized at 1,690 after having been as high as 1,450. The most crucial economic event in Bulgaria's troubled post-communist history, the establishment of a currency board to peg the lev at a rate of 1,000 to the Deutschmark, will finally take effect in July after months of negotiations.
"There is now some light at the end of tunnel," says Jonathan Hoffman, economist at CSFB. With all this good news on the table, as well as privatizations in the pipeline, is Bulgaria finally on the road to recovery?
"What we are seeing is a honeymoon period for the new government which has driven the debt markets to relatively expensive levels," explains Mark Evans, director of Montpelier Special Funds New Europe, which closely follows events in Bulgaria. "Everything we have been hoping for with the new government, such as announced plans for privatizations and establishment of the currency board, has happened".
Today, the yields on dollar-hedged treasury bills are 23%. Spreads to US treasuries on Bradys have tightened from a peak of 1,600 basis points to 600bp. The fall in yields has been largely has driven by the new minister of finance cutting the central interest rate week by week from a high of 300% to 16% currently.
Even though spreads have dropped to more than 100bp below their previous lows, ING Barings, in a recent research report, expects that the momentum of good news is likely to continue to have a positive effect on the market through the summer months. In the short term, although overall volatility may spark a correction, given the general flow of funds into high-yielding instruments, Bulgarian Bradys are expected to do well. Hard-currency reserves are more than adequate to insure that the lev rate is pegged comfortably at 1,000 to the Deutschmark.
Relationships with the multilaterals have also improved. The IMF representative, Anne McGuirk, said in June that the IMF would open negotiations on an extended funding facility this autumn. The EU has proposed a 10-year Ecu250 million ($287 million) balance of payments facility and the World Bank has offered an $80 million loan for social security reform.
The target for privatizations in 1997 has been set by the new government at $350 million. So far, the only major privatization has been the sale of Sodi-Devnya, a chemical concern, to the Belgian company Solvay for $160 million. Recently, the new cabinet has approved the sale of 51% of Beloizvorski Ziment, a state-owned cement plant, for $33 million in cash and the rest in Zunks - convertible bonds which represent the repackaged bad debt of domestic banks. The sale of 75% of the Neftochem oil refinery, located in the Black Sea port of Burgis, has also been approved.
Other expected sales include a 60% stake in Chemko-Vratsa, a fertilizer producer, for $100 million. Further, the new government announced its intentions to privatize six banks in order to restore confidence in the sector. The Bulgarian Privatization Agency announced additional plans to sell off the Dyuni tourist resort, Verila Bioproducts, Agrobiochem Bioproducts, the MDK copper mine and refinery, and increase the stake on offer in Bulgarian Telecommunications, the national telephone operator. In total, about 1200 firms are expected to be privatized over the next 10 months.
One big advantage for any speculative investor looking at buying in on a privatization deal is that asset prices, even after the run-up in the debt markets, are rock bottom compared with those in Romania, Poland or Hungary. Wages, which stand at an average of $1,000 a year, are the lowest in Europe.
The stock exchange, closed since September 1996 when the total market capitalization was under $100 million, is set to reopen in September in a new building with a new settlement and registration system in place. Most important, the enthusiasm among foreign fund managers for cheap emerging market share prices, which has pushed stock markets up across eastern Europe, has not yet hit Sofia at all.
"At the moment, Romania is the darling of US fund managers but, after that, they will want to look elsewhere. Although it is still too early at this point to be bullish about Bulgarian equity prices, Bulgaria is the last undiscovered stock market in the region, outside of Albania," says Constantinos Grigoriadis, head market analyst for central and eastern Europe at the IFC in Washington.
But investors need to be cautious. "Bulgaria still remains, in terms of its industrial infrastructure, a hollowed-out economy devastated by organized crime and corporate management that have stolen huge amounts of resources," says Evans. "The basic institutions that are necessary to give the country a chance, such as a banking system and the rule of law, are still not there". Ted Kim