An eventful year in Bulgaria was concluded by the country’s accession to the EU, the re-election of President Georgi Parvanov, and developments in the economic and financial sectors.
The most important event of the year in Bulgaria is the entry into the EU. Bulgaria became a full member of the EU on January 1, 2007 after a year in which the country was the subject of both praise and criticism from the Union.
A monitoring report published by the European Commission in May 2006, which was expected to give Bulgaria the final green light for membership, delayed the decision until September, with the threat that accession could be delayed until 2008 if progress was not made in six areas of "serious concern", including organised crime and corruption.
The final monitoring report of September 26 gave Bulgaria the go-ahead for membership, but doubts about the readiness of some sectors of the economy and public institutions remain, with the Commission insisting on a series of "safeguard clauses". These clauses allow for bans on exports of certain goods from Bulgaria and serious cuts in funding if the country fails to tackle issues such as corruption, food safety and misuse of EU funds. Many EU countries, including the UK, have also imposed limits on immigration from Bulgaria.
On the political front, Georgi Parvanov became the first Bulgarian president to win re-election on October 22, with 75.9% in the second round of the vote, beating the ultranationalist Volen Siderov, who was backed by the Ataka union and the Communist Party. Parvanov was supported by the Bulgarian Socialist Party, the main party of the ruling coalition and their liberal partners the Movement for Rights and Freedoms against a range of centre-right and right-wing candidates. Parvanov has been praised for his role in leading Bulgaria into the EU and forming the current ruling coalition, while fighting allegations that he was a secret-service agent in the communist era. The rise of Siderov and Ataka union caused some worries as populism and nationalism have been on the rise in Central and Eastern Europe over the past year.
On the economic front, Bulgaria’s budget for 2007 did not received support from the International Monetary Fund (IMF), which has been Bulgaria’s macroeconomic mentor for several years. GDP growth for the year is estimated at around 6% but expenses have increased 10% to $13.2bn year-on-year, with $703m set aside in preparation for handling the increase in EU funds available, while Bulgaria is expected to lose $335m in VAT duties following accession.
Still, as of January 1, Bulgaria cut set corporate tax from 15 to 10%, and gave guarantees that the new rate would not be changed for 20 years. The cut places Bulgaria among the countries with the lowest profit tax in Europe, together with Cyprus. The move has received wide support from both Bulgarian business leaders and politicians seeking to attract more foreign investment to the country and help develop small-sized enterprises, but has come under strong criticism from the IMF, which also objected to the government’s decision to raise public sector salaries by 10%, in the face of Bulgaria’s large current account deficit.
Meanwhile, 2006 saw impressive growth in the banking industry with credit growth year-on-year above 22%. With more than 83% of Bulgaria’s banking assets under the control of foreign banks or financial institutions, foreign-owned banks are bringing huge growth in retail banking. Many banks made strong moves in 2006 to finance small-and middle-sized enterprises and the agricultural sector, which had previously been relatively underfinanced. But there are still problems to resolve. The local-and-forex interest rate spread narrowed to 6.56% but it remains one of the highest in the region. If the sector has fully recovered from the 1996 – 1997 crisis, economic and psychological barriers remain for a relatively large proportion of the population, particularly in using credit cards.
Bulbank, Biochim and Hebros Bank, which are all part of the Italian-based UniCredit Group, are due to merge by mid-2007 to create a “super bank”, the largest in the country, under the name UniCredit Bulbank. The banks together currently have assets of $4.4bn and 326 branches across the country.
In the meantime, , a number of important IPOs and capital increases on the Bulgarian Stock Exchange (BSE) significantly raised liquidity, as well as interest in the Exchange. In 2007, the BSE is expected to merge with a larger partner, and at least five suitors are lining up.
BSE recently met with OMX, the Scandinavian bourse who operates in Sweden, Finland, Norway, Denmark and the former Soviet Baltic states of Estonia, Latvia and Lithuania, to discuss opportunities for co-operation. Hellenic Exchanges Holdings, which runs the Greek spot and derivatives equity market, is also interested in the acquisition of a 44% stake in the BSE. It is rumoured that executives from both exchanges will meet in early 2007. BSE management had a similar meeting with counterparts from Germany’s Deutsche Börse on December 15. Deutsche Börse is considered to be the front runner as it offers the BSE opportunities for integration with EU exchanges and other possible “partnership formats”. Other exchanges keeping an eye on the plans to privatise the 44% stake in the BSE held by the government include the Vienna and Warsaw bourses.
Most brokers are in favour of a merger with a larger partner, on the grounds that it will bring increased accessibility for international traders, better technology and more sophisticated instruments. However, some have expressed doubts about certain bidders, worrying about their size, as large candidates would swamp the BSE and decrease its visibility. Meanwhile, others question the technology and long-term viability of potential suitors.
