How strong is the government right now? I think we are in a fairly comfortable position, mostly by virtue of the economic track record that we’ve established in the past few years. The growth rate has been between 4% and 5% for several years in a row. We have a low single-digit inflation rate this year, with the public debt to GDP ratio substantially down in two years from 75% to 50%. We’ve had a stream of credit rating upgrades – eight of them in two years. This goes hand in hand with lower unemployment, which has gone from 19% to 14% in two years. And we’ve also put the current account deficit in control.
The budget deficit is one of the lowest in Europe and the IMF programme is performing very well. The expectation that has yet to materialize is a pick-up in foreign direct investment. That is down, but we believe there will be serious pick-up next year.
Could the government be selling its case better? That may very well be the case. Ordinary Bulgarians in the street don’t care much about low inflation or a low budget deficit. They rather want more money in their hand now. We could go and spend more aggressively, but this would not be a recipe for a successful economy. It’s true that our popularity rating is down to about 10%. And the Bulgarian Socialist Party has double that endorsement. But even its rating of 20% is hardly enough to win an election. The main feature of popular feeling is indecision.
Why isn’t there that feel-good factor? For one, I believe a somewhat longer track record is needed. On the other hand, the expectations were perhaps far too high compared with reality. And if you add the painful reforms that we have undertaken, painful but necessary, that completes the picture.
How are you going to balance pushing through IMF-required structural reforms while also keeping unemployment down? Our philosophy is that the two are not contradictory. Privatizations and reforms are vitally necessary to increase foreign direct investment, and investment will take care of poverty and unemployment, over time of course. We have scored some success already with the unemployment rate, but for incomes to pick up we really need more private investment.
How can the problems with privatizations be overcome? I’d like to try to dispel the notion that privatization has failed or is about to fail in Bulgaria. A lot of attention has been focused on these deals, Bulgartabac [the state tobacco company] and BTC [the state telecom company], but less has been said about the successful privatizations, one of which, DSK [a bank], is much larger than Bulgartabac and at least as large as BTC.
The banking sector is now fully privatized. After we sold the fourth-largest bank, Biochim, in the summer of last year, for three times more money that was offered for the same bank a year earlier, we proceeded to the privatization of DSK, and were even more successful with that deal, especially with regard to price. Last year, I would have expected a price of around e200 million, then JPMorgan valued the bank at between e220 million and e250 million. In the event, we sold it for e311 million, to OTP, the best CEE bank.
How will the privatization of DSK affect the banking sector? I have very high hopes for the banking sector, some of which have already been realized. The amount of bank loans grew by a factor of two in three years, by an annual rate of 40%. I expect a lot more of this kind of growth, given that not only is the economy growing very fast, but banking assets compared with the size of the economy are still very low, so there is a lot of catching-up to be done. The kind of aggressive competitor that OTP will be will inevitably jolt the cosy banking club, and the clear winner will be the consumer and the economy as a whole.
How can the government encourage the growth of the domestic capital markets? On the fixed-income side, we have doubled the size of the treasury bond market, albeit from a low base. We have doubled the average maturity of government bonds, and that’s helped increase liquidity. On the equity side, the government has helped by floating stakes in state assets. A good example is the 12% market share in Bulgartabac, which was sold quite successfully. On the demand side, we are inducing the growth of domestic investors, by, for instance, deciding from next year to increase the proportion of pension contributions going to private pension funds.
What’s the to-do list for the ministry of finance before you join the EU? For me, it’s to continue the tight fiscal policy, and move gradually to a tight budget, to continue to cut the debt to GDP ratio and achieve an investment-grade rating for next year, and to create the new national revenue agency, which we officially set up this year. In a nutshell, the agency merges the tax administration with the social security administration. The purpose is to make the tax collection process more efficient, and the expectation is that along with some cost savings this move will generate about 3% increased GDP each year.
Could you say what stage the appointment of the central bank governor is at now? The appointment of the central bank governor should be a fairly straightforward affair, and it’s not supposed to be a very long process. The present governor has come to the end of his term, and discussions are actively under way to elect a new governor. It seems that a majority of MPs are in favour of electing a new governor.
Hasn’t your party has been pressing for Svetoslav Gavriiski to be replaced by Ivan Iskrov, someone who is more your man?
I am not hiding the fact that I am on very good terms with Mr Iskrov. But he is yet to receive sufficient support. We are not out of the woods yet, but I believe in the next month we will hear. If neither candidate can get a majority, it’s not impossible that a third candidate will be nominated.
