Банкеръ Weekly

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INVESTMENT SOLITAIRE WITHOUT A JOKER

An ancient Chinese wise saying prescribes: Something should change in order to preserve things such as they are. But have Bulgarian government financiers become aware that the moment has come for making changes to the domestic tax medium in order to maintain the level of foreign investments in this country?
In end-2005 InvestBulgaria Agency (IBA) proudly reported that the State was again about to break a record in terms of inflow of foreign capitals into the domestic economy. Statistical data sound optimistic indeed. According to the forecasts of the Bulgarian National Bank (BNB) for the entire 2005 the money from abroad, injected in the domestic economy, will reach the record high EUR2.2BN. For comparison, foreign investments totalled EUR1.957BN (10.1% of GDP) in 2004, and EUR1.850BN (10.5% of GDP) for 2003. What is noteworthy according to government analysts is that for the first time in 2005 the reported and forecast data about investments in Bulgaria
do not include proceeds from privatisation, which are negligible
This means that our country already relies on the trust of foreign investors who invest their money in new enterprises and capacities, and not in purchase and sales. Another record for Bulgaria is the emerging tendency of doubling the number of foreign investors who step onto Bulgaria for the first time. While 110 such projects were implemented in 2004, their number for 2005 is around 150, and is expected to be still higher in 2006. The total volume of expected capital investments for 2006 is EUR6.1BN, of which EUR3.8BN will be Bulgarian and EUR2.3BN - foreign. Their growth from 2005 will be 10 per cent. Twenty new investment projects will begin to be realized until March 2006, investors' forecasts show.
The increase of MobilTel's capital in connection with the operator's purchase by Telecom Austria is the biggest investment in Bulgaria for 2005. The deal is worth EUR1.6BN. LUKoil is second in the rating with its investments in the expansion of Neftochim Bourgas and the company's network of petrol stations. Next come several banks, projects in real estates, Sisecam, Dundee Precious, Asarel Medet, etc.
Unlike 2004 when the bulk of investments went to the energy sector and banks, their distribution is more even and balanced now. According to expectations, 25% of the investments next year will be in production, 20% in services, 20-25% in power engineering, and about 30% in the extracting industry and transport. There will be a strong inflow of capitals into the IT sector and telecommunications as well.
Bulgarian investments abroad are also record high. They total EUR250MN, or 10-fold the amount in 2004.
Comments of competent foreign experts also praise our investment achievements: Bulgaria's economic development in the last eight years has been markedly successful. GDP's growth is high, macroeconomic stability has been restored, and the country's integration into the European Union (EU) is expected in the near future. As a result, the inflow of foreign direct investments per capita of the country's population is one of the highest in the region. This has been written in the report of the international consultants and analysts from Delloite Touche, dedicated to the investments in Bulgaria.
However, the document underlines the strong dependency of this country's economy (especially the volume of foreign direct investments) on several more large-scale investments). It also points out
the necessity of a new strategy
regarding the attraction of foreign capitals. The consultants from Delloite Touche recommend decisive measures as privatisation cannot be the core magnet for money from abroad, which pump up the country's economic growth.
The analysts from Delloite Touche claim that the future top sectors of Bulgaria's economy which could attract most foreign capitals are the IT and telecom technologies (electronics included), outsourcing, production of of machines and electricity equipment. In order to make these investment miracles happen, however, Bulgaria should eliminate some significant weaknesses and competition shortcomings in comparison with the other countries in the region, mainly Romania and Croatia. Our country should undertake active measures for overcoming the weaknesses by emphasizing on the development of
education and training, infrastructure, management reform, and incentives
For the time being, however, there are no indications if the incumbent rulers will pay attention to these recommendations. The government financiers forecasts are that economic growth in this country will be in the range of 5.5-6% in the next few years. No doubt, foreign investments are among the main reasons for the domestic economy's growth. Therefore, it should be expected that the Government will proceed with making new tax concessions for the investors. But they could be practically enforced only in 2007, and it's not clear where Bulgaria will be positioned then on the region's investment map.
The reason is that back in 2005 neighbouring Romania made important reforms and improved the business climate by introducing a flat 16% tax in its huge economy, which is like a magnet for foreign capitals. The corporate tax is 10% in Serbia and 9% in Montenegro.
In that respect, with a 15% corporate tax Bulgaria
cannot be a worthy competitor
to these countries. On the other hand, there are still approximately 158 permissive and licensing regimes in our country (according to Deputy Finance Minister Georgi Kadiev). According to Mr. Kadiev again, the zero tax rate on reinvested profit which BSP as the dominant party in the tripartite ruling coalition BSP-NMSII-MRF gave up, is an inevitable measure for the attraction of foreign capital to Bulgaria. In an interview for the BANKER weekly he said it was also important for achieving economic growth, as according to the left-wing party the domestic resources have been almost exhausted.
We are considering an eventual reduction of of the corporate tax rate and increase of the companies' expenses, acknowledged from a tax point of view. We'll be aiming to encourage investments by accelerating amortization of certain groups of assets, Finance Minister Plamen Oresharski said in the end of last year.
If this comes true and the profit tax rate is reduced to 12.5% or goes even downwards, the country will already have at least one joker in the region's investment solitaire.
Because it would be a big mistake to take foreign capitals for granted. Many economists claim that investors are timid animals and they easily choose the most convenient and profitable place for greenfield investments. Especially those of them who have put their money in light an mobile productions.

PARALLELS:
According to forecasts, for 2005 Romania will be the No 1 country in Southeastern Europe in respect of absolute worth of attracted investments. Statistical data show that some EUR3.5BN entered in that country within the January-October 2005 period alone and the amount was exceed EUR4BN by end-2005. This means that the absolute volume of attracted investments in our neighbour country are two-fold the aggregate investments in Bulgaria. On the other hand, a slight decline in the inflow of foreign capitals has been observed in Romania vs 2004 when the record high EUR5BN-plus was attracted to the country within a year.
As compared to Croatia, Bulgaria will most probably remain second according to attracted investments per capita of the population. EUR1.25BN entered Croatia in the January-September 20065 period, and investments for the entire year were have been estimated at almost EUR2BN. But that country's population is almost twice less than Bulgaria's. This means that Croatia will be the No 1 country in the Balkans in terms of attracted investments per capita.
It's fact that after the big leap Romania did in the 2003-2004 period - from almost EUR2BN attracted by the country in 2003 to EUR5.2BN in 2004, a decline was reported last year.
the opposite trends are evident in Croatia. A two-fold decline of investments was registered in the 2003-2004 period, from EUR1.8BN in 2003 to about EUR1BN in 2004, while an increase of investments became apparent in 2005.

PROJECTS
Construction of the new electricity station on the site of the Maritsa Iztok 1 thermoelectric power plant will begin in the spring of 2006. EUR1BN-plus will be invested in the project, which makes it the biggest greenfield investment in central and Eastern Europe. The French industrial group Montupet S.A. will invest more than BGN70MN in the construction of a plant for aluminium automobile parts in Rousse, where spare parts for the world-famous Renault, Peugeot, Audi and Ford cars will be made.The project will be implemented within three years and 867 working positions will be opened. The aim is for the Rousse-based plant to become the company's main production unit in Europe. Montupet S.A. has enterprises in France, Spain, Canada, Northern Ireland, Mexico, etc. Its is a partner of General Motors, Crysler, Ford, Peugeot, Renault, etc.
Germany's Lindner Holding will invest more than BGN163MN in Business Park Sofia in the next three years. It is expected to create some 6,300 working positions.
Sisecam's investments will reach USD220MN. In July 2005 the Turkish company's first mill for flat glass was commissioned in Targovishte, where USD70MN was invested. Sesecam plans to open two more enterprises - for the production of flat, processed glass, and for mirrors in the same town. Thus, Targovishte will become a main centre of glass-making in Europe. Some 1,065 working positions are expected to be opened in the region.

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