Marking Up

Economic News

22 Jul 2010
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After Bulgarian concluded its negotiations with the EU on its accession chapters last week, the positive fallout is already evident. With a leading international ratings agency shifting the country from speculative to investment grade, it seems Bulgaria is now well on track to seeing more foreign interest, particularly with approval for a new IMF agreement now also under its belt.



Standard & Poor's Ratings Services announced June 24 that it was raising its foreign currency sovereign credit ratings for Bulgaria from BB+/B to BBB-/A-3, and its local currency sovereign credit ratings from BBB-/A-3 to BBB/A-3. The outlook is stable.



"Bulgaria's improved creditworthiness is supported by its high growth potential, prudent fiscal policies, and European integration," Standard & Poor's credit analyst Moritz Kraemer said when announcing the new grading. "The integration process will culminate in Bulgaria joining the European Monetary Union [EMU], most likely in 2010... EU accession, meanwhile, is well on track for completion in 2007, following the conclusion of the negotiations in June 2004."



This conclusion was reached after four years of meetings between Bulgarian and EU officials. A landmark event, Foreign Minister Solomon Passi even went so far as to compare it with the unification of Bulgaria that took place on September 6,1885, after the Russo-Turkish War.



"Concluding the EU negotiations is a second unification of Bulgaria," he told reporters after the end of talks had been announced June 15. "But this time it is unification with the European family."



Finance Minister Milen Velchev also pointed out that the final agreement made Bulgaria "the biggest EU money beneficiary compared to the country's GDP". This came after the EU promised 240m euros extra under the miscellaneous chapter, in addition to the 4.5bn euro allocation already agreed.



"The additional allocations will come in the first three years of accession and would finance measures to strengthen border control and security," Velchev said.



The miscellaneous chapter also has 550m euros in financing for the decommissioning of Reactors 3 and 4 of Bulgaria's lone nuclear power plant at Kozloduy and 30m euros for administrative capacity building.



Yet the S&P upgrade also reflected confidence on ongoing structural reforms within Bulgaria. These now look set to continue regardless of any political shifts, thanks in part to the EU path being now so firmly set. S&P's Kraemer added that the conclusion of EU negotiations "should lock in the structural reform process and provide for potentially significant transfer payments, which would contribute to the alleviation of Bulgaria's weak external liquidity."



This later point has been an area of concern recently, as external imbalances have been widening. This resulted in a current account deficit of around 8% of GDP last year, with little market expectation that this will fall significantly until next year. Yet S&P seemed confident that the government was tackling this problem and had taken the necessary measures to squeeze expanding domestic credit, often seen as a major factor behind the widening trade gap.



S&P also predicted a continuing decline in debt, which is already well down from the 80% of GDP level of 2000, and set to level at around 33% by 2007, if the S&P report's assumptions prove correct.



Helping keep the government in line - and indeed, any successor government - will be the need to implement what has now been agreed in the chapters. Also constraining any different policy initiatives will likely be a new agreement with the IMF. June 14 saw the announcement that the IMF board had approved the signing of another agreement with Bulgaria, likely to be a $300m precautionary deal. The money will have an "emergency use only" label, and remain with the IMF unless called upon.



The agreement will also likely address the current account problem by requiring government strictures on banks' lending.



Yet this has not gone without criticism, particularly on the opposition benches and amongst the country's unions. The rightist Union of Democratic Forces (UDF) has already declared its intention to challenge the parameters of the IMF agreement, saying that there are not enough restrictions within it, while unions argue that there is an intention to freeze salaries disguised within it.



Employers have also reacted against government intentions to restrict credit growth. Union of Employers Chairman Vassil Vassilev argued in a statement last week that lending should not be curbed, as the problem was not in the amount of credit but relations with lenders. He also argued that the current account deficit was not the problem thought, as it was being covered by receipts from Bulgarians abroad - and in consequence, the government should go for growth, pushing 8-12% annual GDP enlargement.



Meanwhile, back in parliament, there have also been attempts to deflate the government's EU balloon.



"Closing chapters is easy," Borislav Tsekov, deputy chairman of the Novoto Vreme (New Time) parliamentary group told parliament after the announcement. "However, turning commitments into real social practices and governance is hard work and a challenge to all future cabinets and parliaments."



While many might dispute the first part of Tsekov's statement, few would take issue with the last. Yet with growing international good will, and continued commitment at home, there are now clear hopes that Bulgaria will be able to meet those future challenges.

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