Банкеръ Weekly



The Bulgarian economy is on its way in 2005 to say goodbye to the mistakes of the period of transition. The Government kept achieving macroeconomic success in the whole 2004 and at the end of 2005 the gross domestic product (GDP) per capita is expected to reach 96.2% of its 1989 level. This became possible since the economic growth kept gravitating around 4.7% in the past four years, the inflation and unemployment rates remained low, and the investment and privatisation activities stirred up.The performance of the Bulgarian economy in 2005 cannot be examined separately from the global economic tendencies and, mostly, from the tendencies in the European Union, because of the great extent of its integration into the EU single domestic market. Analysts predict that the growth of the world economy in 2005 will vary from 4.09 to 4.36%, while the growth in the euro zone will be 2.27-2.54 per cent.On the verge of thenew economic eraBulgarian rulers promised that the economy would grow by 5-5.5% on an average in the new year. Anyway, whatever results the future government (the one to be formed after the June elections) reports at the end of 2005, the macroeconomic stabilisation trend will be kept. Still, that cannot help overcome the gap existing between the income per capita in Bulgaria and that in the EU countries. The European Commission (EC) has calculated that Bulgarian people only have at their disposal 29% of the average monthly earnings of the citizens of the 25 EU countries. Attention should also be paid to the analysis of the Centre for Economic Development which claims that if Bulgarian production grows by 6% every year, the local standard of living will reach 70% of that in Western Europe in 40 years.No doubt, the Cabinet of the National Movement Simeon II (NMSII) is not going to make unexpected steps in the financial or the economic field in 2005, but will prefer to keep the currently moderate yet certain pace of growth. Still, that will not be an easy task. For example, nongovernmental experts say that some factors that influenced the GDP growth in 2004 are rather single. Among them are the drastic expansion of the domestic crediting (50% up compared to 2003), as well as the low interest rates on the international forex markets. Moreover, the 5-5.5% growth of the GDP in 2005 predicted by the Government may turn out lower. According to a late 2004 analysis made by the Agency for Economic Analyses and Forecasts (which is within the structure of the Ministry of Finance), should the price of an oil barrel remain around USD40.5 in the next twelve months, the GDP growth will reach 4.7% at the most. The services and industrial sector is expected to remain the major contributor to the economic growth in 2005.It will not be easy in the field ofpublic financeseither, since the negotiations with the International Monetary Fund (IMF) for signing a new precautionary agreement were frozen. As the establishment of the state-owned company Public Investment Projects proved, the Cabinet will hardly hesitate whether or not spend the BGN260MN allocated from the fiscal reserve for repair of the municipal roads on the elections eve. However, it is difficult to forecast how the budget revenues part will be implemented and whether we shall see a record surplus in 2005 again.In practice, this year's Treasury revenues will be administered by two governments (the one currently in office and the new one that after the elections). No matter what colour the administration will be, it will have to get ready for two radical changes in the tax and customs field. One of them is the introduction of the so-called excise warehouses and the transfer of the right to collect excise duties on transactions within the country from the tax authorities to the Customs Agency. Then the establishment of the National Revenues Agency will have to be prepared so that it could start operations in January 2006. The agency will be responsible for the collection of taxes and health insurance payments.Another curious issue is the forthcoming debate on the amendment of the Constitution that will allow municipalities define the size of the municipal taxes and fees.Thecurrent account deficit of the balance of payment has been a traditional risk lately and it will face the Bulgarian economy in 2005 again. The Government expects that it reach 8.34% of the GDP. Still, the main question is whether the amount of attracted direct foreign investments that should be some EUR1.5BN will be sufficient to cover it. The most recent analyses made by the Finance Ministry sound a little optimistic. They indicate that in the year that ended the the current account deficit will be 7.7% of the GDP and not 8.8%, as predicted earlier. Therefore, if the trend remains, we should not be much worried at least by next year.However, it would be naive to believe that foreign investors would prefer Bulgaria just because the Cabinet hopes so. Regardless of the record2004 foreign investmentsamounting to EUR2BN (according to the Bulgarian Investments Agency) a few things should be taken into account. Practically, a big part of the investments registered in Bulgaria represent internal corporate credits and their payment is risky. Also alarming is the fact that an important part of the foreign direct investments is money invested in share capital. It is usually paid by companies that have established positions on the local market. Sooner or later, the privatisation revenues will be deducted from the account, too. As far as the Ministry of Economy announced, there are nearly a hundred companies still owned by the state and about to be sold. In fact, the end of the privatisation process may add significant revenues to the fiscal reserve in 2005, but it will also reveal the symbolic size of the greenfield investments. The hope is that the Encouragement of Investments Act, officially valid since last August, is efficient. It stipulates that the State support the construction of infrastructure accompanying private investment projects worth more than EUR100MN. But the regulation must also be supported by real results in the field of administrative and judicial reform. Particularly important for the improvement of the business climate will be the amendment of the Civil Procedures Code in its executive proceedings part. A group of MPs headed by the Parliament Chairman Ognyan Gerdzhikov put forward a draft stipulating the introduction of private bailiffs last summer. The bailiffs will replace the present state judges who are paid regular salaries regardless of the efficiency of the work they do.Another issue of importance is the growing import of consumer and investment commodities which will inevitably result in new record breaking levels of Bulgaria's foreign trade deficitin the foreign trade of the country. Factors that will keep stimulating the import are doubtlessly the weak dollar and the growth of the consumer credits. According to preliminary forecasts, the foreign trade deficit will reach EUR2.943BN in 2005. And that is not a good sign for the Bulgarian economy, even though the EC acknowledged it was competitive in the mid-term.The integration of the country into the EU is related to some of the most serious challenges facing the Bulgarian business which aremore or less underestimatedA series of sociological studies show that very few of the Bulgarian entrepreneurs know in details what commitments the country has made to the EU. Even more disturbing is the fact that they show no interest in learning.

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