Treading Water

Economic News

22 Jul 2010
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Despite the recent political turmoil and the third round of flooding in Bulgaria's south-east, analysts say that the economy is still looking strong ahead of expected EU accession on January 1, 2007.



After the worst floods for 50 years, the country was sent into yet another state of emergency in early August. Following four days of heavy downpour, torrential floods hit the south-east, killing eight people and leaving over 10,000 homeless. The August 5-8 floods hit hardest just as the country was returning to normal following the June and July floods, which devastated north-eastern parts of the country.



Despite continuing uncertainty over the shape of the new government, the authorities did react quickly through the State Agency for Civil Protection, which provided blankets, beds, mattresses and clothes for families that had lost their homes.



The US Agency for International Development (USAID) also provided €42,000 ($50,000) in emergency relief funds for assistance to flood victims, while on August 9, incumbent Finance Minister Milen Velchev requested 75m euros ($91m) in financial aid from the European Commission to rebuild the submerged infrastructure.



Although damage from the third round of flooding has not been fully assessed yet, the government has decided to award Lv170m ($107.66m) through public investment projects (PIP) for the recovery of infrastructure and for municipalities that suffered damage. Bulgaria had already suffered damage of Lv393m ($248.89m) from flooding back in June and July, with a special commission allocating Lv16m ($10.13m) for the most urgent repairs.



The biggest loss in the June-July floods was the damage caused to the railways between Sofia and Plovdiv, Sofia and Karnobat and the line towards the Black Sea coast, with repair costs running at Lv237m (€118m), according to initial estimates. Complete restoration will take at least two years on the newly developed lines, which had been adapted to enable trains to travel at 160 kph. The damage has stopped goods being able to reach Turkey by train. Trains elsewhere have been slowed down to a speed of 25 kph.



Yet although a great loss of infrastructure has occurred, analysts say that the economy is strong enough to cope with it.



According to some insiders, sector by sector, the area of the economy worst hit by the floods is the real estate market. However, estate agents quoted recently by Investor.bg online said natural disasters such as these only influence the sector in the short term.



Meanwhile, property experts also say that in view of the damaged infrastructure and risks of forthcoming floods, prices of land and property will likely decrease.



At the same time, real estate agents say that much depends on the state policy to be adopted for recovery.



Elsewhere, disasters such as these may indeed attract foreign investors, as plans get underway for reconstruction of the infrastructure network.



Foreign investment has recently been looking healthy in any case. Earlier this week, after the flooding had occurred, the Sofia News Agency novinite.com claimed that Greek businesses had invested some $20.1m in the first trimester of 2005, making Greece the second-largest foreign investor in the country.



Top of the list was Austria, with overall direct investments of $1.83bn as a result of the purchase of the recent Bulgarian Telecommunications Company (BTC) by Vienna-based Viva Ventures.



Most analysts do not see the flooding as impacting negatively on any of this. Yet although foreign investment may not be affected by the state of emergency presently operating in 22 municipalities, citizens will surely be affected in other ways. The bread producers' union, for example, expects to see a 30-40% rise in bread prices.



"We expect a poor harvest to follow the abundant rainfall and flooding this summer," union chief Dimitar Ludiev told BTA news agency. "Together with the recent hike in fuel prices, this will necessitate a 30-40% increase in bread prices in some regions of the country."



Grain crops are also threatened by an ever-increasing rat population in Bulgaria's wheat belt around Dobrich in the south-east, press reports said.



Meanwhile, the impact of the ongoing government crisis on the economy has also been under assessment.



Fortunately, the International Monetary Fund (IMF) issued a report the in first week of August 2005 which stated that it saw no risks for Bulgaria's economy due to the continuing political debate. James Roaf, IMF resident representative in Bulgaria, said that preparations for the 2006 budget were on schedule with no threat to these posed by the lack of a new cabinet.



However, Roaf did comment that with the delay in forming the new government, the suspension of several structural reforms could occur.



An IMF meeting is planned after the formation of the new government, which many hope will be agreed on August 15. Should that fail, a meeting will be called in late September or early October.



The flooding has however entered the political infighting. The Union of Democratic Forces (UDF) proposed on August 9 a number of measures aimed at overcoming the disaster. They called for an improvement in the co-ordination between separate institutions, the establishment of an early warning signalling system and an updating of the state budget.



UDF speaker Nikolay Mladenov also called for the partial cancellation of election results in disaster-hit regions like Belovo and Velingrad, charging that the current government led by the National Movement for Simeon II (NMSII) should not escape responsibility for the situation.



Meanwhile, it is expected that a four-member coalition will be the most likely formula for landing the third mandate to form the new government.



"It is realistic to expect that a four-member coalition between the election winning Socialists, the centrist NMSII, the [Movement for Rights and Freedoms] MRF and the right-wing [Bulgarian People's Union] BPU will be forged by the end of the week," Stefan Sofianski, former Sofia mayor and BPU co-chair said on August 9.



Aneliya Minguova, chair of the NMSII parliamentary group, then agreed that a four-member coalition would best meet the requirements for amending the constitution.



Yet, with much of the damage still to be assessed, as the flood waters recede and the country awaits its new government, analysts may have to wait a little longer for the affects on the economy of this disaster to become fully apparent.

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