Bulgaria shows there’s more to country risk than sovereign creditworthiness

Bulgaria performed poorly last year in terms of its country risk score, which fell by more than eight points, to 50.2, in Euromoney’s quarterly survey, providing an indication of rising risk to investors.

This led to the Balkans state sliding to 79th on Euromoney’s global risk scale of 174 countries, and towards the bottom of the third of five risk categories – below Russia, while remaining just above Serbia among Central and Eastern European countries.

Which all seems rather odd. After all, Bulgaria has very good fiscal metrics, with a debt load of just 25% of GDP, despite it rising. This is enviably the second-most affordable debt load in Europe, trailing only Estonia, and giving ample room for the authorities to increase fiscal spending even more to address the pandemic.

Reflecting this, Bulgaria has just issued a local currency denominated five-year bond for the equivalent of €100 million at a negative yield of 0.17%, demonstrating not only that the market is flooded with liquidity, but also that investors are sanguine about the risks.

This negligible sovereign risk is underlined by a recent rating upgrade by Fitch, which mentioned that Bulgaria's fiscal buffers are supported by favourable financing conditions and liquid fiscal reserves.

Explaining the improving creditworthiness of Bulgaria, ECR survey contributor Tzvetomir Tzanov, a lecturer in the Department of International Business at the University of National and World Economy, says that as well as the fiscal metrics, “Bulgaria is expected to receive substantial funding from the EU in the upcoming years (2021-2027), including grants from the NextGenerationEU [a €750 billion temporary recovery instrument helping Europe recover from Covid-19].”

“A well-targeted absorption of those funds is a prerequisite for accelerated growth,” he adds.

There are also important sector developments, according to Tzanov.

“Manufacturing in general seems to be less affected [by Covid-19] due to lighter restrictions and indications of swift recovery in some industries as of the second half of 2020.

“In line with the expectations for shortening of supply chains and relocation of operations from Asia to the outskirts of the EU, the perspectives for regaining and sustaining economic growth in Bulgaria in the upcoming years seem reasonable.”

Yet still riskier

But Euromoney’s risk survey is not solely a measure of sovereign risk, as contributing expert Norbert Gaillard explained in his excellent book – recently reviewed by Euromoney – it is a much broader measure of asset risk or country investing.

So, what is it that investors must be wary of?

Well, clearly, part of the puzzle has been Covid-19 and its impact on the economy, the healthcare system and social stability.

The country has so far racked up more than 240,000 officially recorded cases of the disease, and almost 10,000 deaths, among a population of just seven million, making it the 13th worst-affected in terms of deaths per capita.

The authorities are beginning to ease restrictions, but with cafes and restaurants remaining closed (prompting protests in Sofia), and foreign tourism still affected, the economic hit continues even if the official indicators are encouragingly much better than expected.

The Covid-19 shock invariably goes a long way to explaining the heightened risks.

However, ECR survey contributor Neven Valev of the Global Economy Project believes that, more broadly, Bulgaria is struggling in terms of its business climate.

“The ECR ratings reflect, in my opinion, this feeling of stagnation and inability to catch up with Central and Western Europe.

“Political instability in the sense of frequent government changes, fragmented/divided government, coalitions that are difficult to hold together etc, is an impediment to reform that can bring improvements.”

We are the country with the lowest level of media freedom, transparency of ownership and financing of the electronic media market, with huge abuses in the last 20 years 

 - Elena Stavrova, South-West University

Bulgaria is staging a general election on April 4, which is shaping up to be a very competitively fought contest with a fragmented parliament the more likely outcome, according to current polling. Prime minister Boyko Borisov’s centre-right Citizens for European Development of Bulgaria and Korneliya Ninova’s Bulgarian Socialist Party will be battling it out to form a coalition with much depending on the turnout, bearing in mind the Covid-19 backdrop.

The elections per se are nevertheless a sign of stability and an active democracy. What is perhaps more concerning is Bulgaria’s other political weaknesses as an EU country.

Elena Stavrova, an associate professor in the Faculty of Economics at South-West University (“Neofit Rilski”) acknowledges that Bulgaria has very low government debt, noting that this is not down to the government but to the currency board regime regulating central bank operations and the government’s ability to “abuse monetary policy instruments”.

Despite this, she is highly critical of other aspects of Bulgaria’s country risk profile: “We are the country with the lowest level of media freedom, transparency of ownership and financing of the electronic media market, with huge abuses in the last 20 years and during our membership in the European Union with funds for financing agriculture and innovation.”

The survey’s low-scoring corruption, transparency and institutional risk factors underline this, and were all downgraded in 2020.

Corruption

Voters are extremely divided, too, she says: “For almost 220 days now, protests have been taking place in the centre of the capital Sofia, demanding the resignation of the government and the chief prosecutor of the republic – a prosecutor who was almost appointed by the government, who ‘reports’ only to God, and has not conducted a single successful investigation into the corruption of a senior government official or stakeholder.

“At the same time, this prosecutor is accused of complicity in predatory seizure of businesses, theft of assets and cultural property, for which he uses security agencies and the state prosecution.

“Unfortunately, this country adopts the worst possible practices of Vladimir Putin's policy in Russia – both in terms of its political opponents, freedom of speech and the functioning of institutions designed to protect the freedom and dignity of its citizens.”

Take the high-risk investments made by the Bulgarian government. Stavrova notes: “A gas pipeline is being built, from which only the importer of gas in Serbia and Hungary through the territory of Bulgaria – Putin's government – will benefit.

“This gas pipeline does not have a single distribution station to which Bulgarian consumers would have access. The Bulgarian taxpayer has already paid the prime minister about €1.5 billion for this adventure.

“Covid-19 finally opened the flow of costs and, in December alone, about BGN7 billion, or €3.5 billion, was spent on this gas pipeline and on reconstruction, which, to be honest, has no result.”

The corruption irking Stavrova is also a major bugbear for another high-profile survey contributor, wishing to remain anonymous, who noted that corruption is endemic and is part of the system whatever the EU attempts to do to prevent it.

This particular contributor also mentioned, tellingly, the longer-term unsustainability of mass emigration, leading to an exceptionally low score for the structural risk factor concerning demographics.

The propensity of young Bulgarians to emigrate from their country was described as of “Lebanese proportions” – that is, shockingly high.

Since 1999, Bulgaria has lost about one-sixth of its population, and this was during the supposedly “good” period of growth and stability, the contributor mentions.

It then lost another 10% or more during the turbulence of the early 1990s and the transition to a market-based system.

In this light, it would seem that Bulgaria is facing a demographic disaster about 10 to 15 years from now.