Country risk: Bulgaria is one to watch in 2022

Bulgaria has several weak aspects to its economic, political and structural profile, including low scores for corruption, information access/transparency and its demographics, making it a medium-risk option.

Despite this, its country risk score improved in Euromoney’s survey in 2021, partly reflecting the gradually improving pandemic situation, with economic growth returning.

It is also a response to the successful formation of a government after elections that were held for a third time in November, in the wake of two failed attempts following inconclusive outcomes in April and July.

The government has been formed by Kiril Petkov, with his newly established We Continue the Change (Prodalzhavame Promyanata, PP) coalition that he jointly leads with Asen Vasilev, his deputy and minister of finance. The government is supported by a larger heterogenous four-party coalition, which is united in its opposition to the former ruling party, Citizens for European Development of Bulgaria (GERB), led by Boyko Borisov.

Petkov and Vasilev are both Harvard-educated entrepreneurs in their 40s with great ambition for change, and their political rise has come in the wake of anti-corruption protests that began in 2020, the Covid-19 pandemic and a stop-start economic recovery.

ECR survey panel expert Tzvetomir Tzanov, from the department of international business at the University of National and World Economy, is guardedly optimistic and has upgraded his economic-GNP outlook, institutional risk and government stability scores to a less risky level.

“It is expected that the Ivy League educational and entrepreneurial background of Petkov and Vasilev would contribute towards a more strategic approach stressing Bulgaria’s competitive advantages within the EU and Nato, supporting innovations and the development of the local start-up ecosystem,” he says.

Describing how the prime minister has stated there will be zero tolerance for corruption, and that among the main priorities of his cabinet will be boosting Covid-19 vaccinations, energy transport diversification and immediate tasks such as dealing with rising energy costs, Tzanov states that, “hopefully, this will be positively affecting the investors’ outlook within and outside the country.”

Another panel member, Neven Valev, senior economist at Globalen, agrees that the formation of a government after three elections is welcome, as well as having a prime minister from one of the so-called reform parties.

Reality check

Still, Valev is yet to be fully won over. Part of the problem is that the leading party won only around 25% of the vote in an election with just 40% voter participation.

“The pro-reform mandate is not as solid as one would hope. The wide diversity of the coalition parties also raises some doubt how much can be done,” he says.

To Valev, the Harvard background of Petkov and Vasilev may have helped in the campaign but its impact in the administration will probably be minimal and the lack of substantial administrative experience may be a problem.

The impetus for reform may be lost, too, as various pressing current issues must be addressed, including North Macedonia, vaccinations and energy prices.

“At the same time, voters are impatient and expect rapid results on the structural problems and especially on legal reform and corruption. It remains to be seen if the new government can move fast enough to meet these demands,” Valev warns.    

Bulgaria is currently 72^nd out of 174 countries in Euromoney’s global risk rankings, a low-lying, tier-3 (moderate risk) option on a par with Armenia, Papua New Guinea, Seychelles and Russia, but only two points off Italy, and three from Croatia, prior to the imminent release of the survey results for Q4.

The rise in the price of natural gas and inflation more generally are certainly key pressing issues, with inflation accelerating throughout 2021, to 7.3% by November.

This has led to “contradictory first moves”, according to Tzanov, such as imposing a moratorium on the price of electricity for households and a disproportional swift rise in government spending, leading to a BGN4 billion deficit at the end of 2021 from a budget surplus a month earlier. The latter was among the commonly criticized approaches of the governments led by former PM Borisov, he points out.

Despite this, the 17% rise in government revenue in 2021 means the budget deficit will be kept within 3% of GDP.

Valev, meanwhile, notes that inflation is a global phenomenon which he does not anticipate lasting more than a year.

He also figures that political change might bring some “house cleaning” and, in that sense, improve the investment climate, but he will be waiting a while before making a fuller assessment.

“There is relatively strong public support behind the push for reforms to, for example, lower corruption, but it is not yet clear how exactly that would be achieved,” he adds.  

To make a more concerted move up the rankings, Bulgaria will not only need to improve its rather low Covid vaccination rate – undermined by general reluctance among the population – but also improve its institutional expertise and administrative experience.

Bulgaria is entering 2022 lacking an annual national budget that still needs to be adopted by parliament.

There is relatively strong public support behind the push for reforms to, for example, lower corruption, but it is not yet clear how exactly that would be achieved 

 - Neven Valev

In addition, the country remains the last among the Central and Eastern European EU member states that is still working with the European Commission on a clean and legally binding version of its €6 billion Recovery and Resilience Plan.

There are also some former Soviet university alumni in high-ranking positions within government structures and financial institutions owned by the state, such as the Bulgarian Development Bank.

“For the time being, this is hardly contributing to a more effective and widespread support to local businesses and industrial sectors which were affected the most by the pandemic, despite the theoretically vast availability of national and EU funding resources,” Tzanov states.

Valev goes on to say there are some promising signs, but reforms to key sectors, such as healthcare, education and energy, may get bogged down in intra-coalition disagreements and slow implementation due to insufficient administrative capacity.

“Efforts to improve the rule of law may also be slow and fruitless if they are exclusively focused on replacing current office-holders,” he suggests.

In that vein, Bulgaria, it would seem, is at a crossroads. Whether or not it takes the right path, and how far along that path it can go, certainly make it one to watch in 2022.