Nikolay Vassilev, Bulgaria’s deputy prime minister and economy minister, rushes back into his office shortly after midnight on a Friday, having been locked in meetings all day. His dinner is a McDonald’s hamburger and chips, forced down as he begins yet another meeting. Bulgaria makes very different demands to those Vassilev faced when he was a London-based investment banker. However, he remains enthusiastic.
“Reform reached the point of no return a year ago. The majority of assets are in private hands and nearly three-quarters of all business is done by the private sector,” he says.
More important this optimism is shared by international investors and investment bankers, who see Bulgaria, along with Romania, as the next convergence plays. Bulgaria has tapped the Euromarkets twice in the past couple of years and the bonds are trading at tight levels.
Bankers say the country’s bonds will continue to be in demand though there is some concern that privatization is not proceeding as fast as expected. The IMF, for example, while praising the country’s economic policy, has stressed the need to maintain the momentum on these structural reforms. And the ratings agencies may delay raising Bulgaria to investment grade until companies such as the Bulgarian Telecommunications Company (BTC) are privatized. At present Standard & Poor’s rates the country BB+ with a stable outlook, Fitch IBCA BB with a positive outlook and Moody’s Ba2 with a stable outlook.
With only four chapters still to negotiate, Bulgaria is way ahead of other countries looking to join the EU in the second wave of eastern under-report revenues for tax purposes. This can easily be seen if one works at a bank.”
Even if this evidence fails to convince the voters, there is little likelihood that even a socialist government could turn back the clock.
All parties endorse Nato and EU membership and are committed to maintaining the currency board system. “The changes have gone so far that they are irreversible – there is no way we can return to an unpredictable environment. We have been through transition and need to build on this,” says Sasha Bezuhanova, general manager of Hewlett-Packard Bulgaria.
However, the government’s ability to direct events has been hampered by its late arrival on the political scene – the governing party was formed only months before the 2001 elections. This means that it has had very little influence in other parts of the government process such as the politicized judicial system.
Evidence of this has been apparent in recent controversial decisions by the courts. These will at best delay the sales of the tobacco and telecommunications industries, which the government is under pressure from the IMF to sell as rapidly as possible.
These decisions will not only hold up much needed management modernization and investment but may also make foreign investors feel nervous about the government’s ability to control the process.
Ministers, though, are trying to take more control of institutions and install their supporters in important positions that have until now been held by members of different parties.
A key trial of strength will be over the governorship of the central bank. The government wants to appoint its own candidate even though the current governor, Svetoslav Gavriiski, a finance minister in the Union of Democratic Forces government that preceded the present administration, has said he wishes to stand for a further term. Ministers, while careful to express their respect for his professional expertise, believe he is too close to the previous governing party.
The government has nominated Ivan Iskrov, currently the chairman of the budget and finance permanent committee at the National Assembly. Iskrov, who has worked as a senior executive at the central bank as well as in the commercial banking sector, is also careful to praise Gavriiski’s governorship. But he says that the central bank “needs to be governed in a more transparent way”.
Resolving this issue will call for sensitivity. According to Marco Annunziata, emerging-markets analyst at Deutsche Bank: “There is a risk that the nomination process could be seen as driven by political motivations. While the central bank has very limited policy autonomy in the context of the currency board, upholding its reputation is important in the perspective of accession to the EU and eventually the eurozone.”
European membership. Once the current IMF programme expires in February next year, Bulgaria is likely to switch to a precautionary arrangement. “By then its financing situation could have improved to the point of making IMF financial assistance unnecessary,” says Marco Annunziata, emerging markets analyst at Deutsche Bank.
At present Bulgaria has a two-year standby agreement and a $750 million support strategy from the World Bank. The European Bank for Reconstruction & Development has launched a $500 million private sector financing programme. The only threat to the financial position could come if Bulgaria fails to meet its privatization revenue targets this year. It might then try to tap the Euromarkets again, though bankers say that its healthy budgetary position would not make this essential.
Industrial production is up 20% in the year to March and industrial sales have increased by 28.5%, while exports have grown by 42%. Inflation in the first four months of the year is only 1.5% and ministers expect it to fall to zero by the end of the year.
Other figures are equally impressive. GDP grew by 4.8% last year and is set for higher growth in 2003. The country has record high foreign exchange reserves of e4.58 billion and a near record low external debt of $8.3 billion.
A second wave of economic reform is designed to give much more targeted support to business areas that need development.
A private-equity fund will be launched soon with money from the government and private sector. It will complement a private-equity growth fund created by the EBRD to invest in companies in Bulgaria and Romania with up to 250 employees and turnover of up to e40 million. Other plans include the creation of industrial zones with investment incentives, the introduction of 100% yearly depreciation for equipment for priority investment projects and VAT-free imports for investment projects of more than e5 million.
