Country risk reference rating: Level 5 (5/9)
Country Risk Outlook: Stable
◆Political Risk
Bulgarian governments change frequently. Since 1999, no government has been re-elected. In the context of the current political crisis, people’s political trust has gradually declined, but the political situation has remained relatively stable.
Bulgaria is the poorest country in the EU. The European Commission’s 2014 Member State Reform Plan Report shows that the Bulgarian people are at the highest risk of poverty and social exclusion among EU member states.
Bulgaria’s current recovery process is slow, youth unemployment is rising year by year, and public anti-government sentiment is increasing. As the situation in Europe improves, Bulgaria’s economic growth is expected to accelerate in 2014. But the Ukraine crisis may affect Bulgaria’s economic development.
In this country, the possibility of foreign investment being expropriated and nationalized is relatively small, but under certain conditions, some actions carry certain risks. Bulgaria’s foreign exchange regulations for the free movement of capital have been adapted to EU rules. In March 2003, the Parliament approved the lifting of the restriction on exports of BGN 20,000 that required central bank approval. However, the above amounts must still be declared to register their source. Any income, capital, and tax-related interest can be withdrawn without restriction.
◆Economic Risk
In the five years before 2009, the Bulgarian economy has maintained a rapid growth rate of more than 6.0%. Affected by the international financial crisis, gross domestic product (GDP) fell to -5.5% in 2009, but began to recover in 2010. Although the euro zone sovereign debt crisis broke out and caused turmoil in the financial market, Bulgaria, located in the Balkan Peninsula in southeastern Europe, was inevitably affected and affected. However, its economy has not fallen into recession again, but has maintained a growth trend.
In the past two years, the three major international rating agencies have not changed much in Bulgaria’s sovereign debt ratings. In the context of the European debt crisis, Fitch Ratings confirmed Bulgaria’s long-term foreign currency issuer default rating as BBB- in July 2013, with a stable outlook.
With the improvement of the external market environment and the adjustment of government fiscal policies, Bulgaria’s economy is expected to accelerate growth in the future. From the perspective of macroeconomics, financial system, fiscal situation, international balance of payments, sovereign debt and bilateral economy and trade, it is generally relatively optimistic. However, Bulgaria’s domestic demand and labor market are still relatively fragile. The further intensification of the Ukrainian crisis is likely to lead to the country’s collapse. Energy supply issues and refugee resettlement risks.
◆Business environment
Bulgaria has established an Investment Agency, which is responsible for the formulation, implementation and promotion of investment policies. The Investment Promotion Law is the main legal basis for the management of foreign investment. Bulgaria implements a foreign exchange management system in which current accounts and capital accounts are freely convertible. Foreign-funded enterprises can freely set up foreign exchange accounts with local registration numbers and remit foreign exchange freely. After the financial crisis, the scale of foreign investment attracted by Bulgaria fell sharply. According to data from the Bulgarian Central Bank, foreign direct investment absorbed by Bulgaria in 2013 was 1.229 billion euros, a year-on-year decrease of 17%. The Netherlands and Luxembourg were the largest sources of foreign direct investment, with 603 million euros and 200 million euros respectively. Foreign investment mainly flowed to transportation, Warehousing, communications, wholesale and retail, repair and manufacturing; the UK has withdrawn the most investment from Bulgaria, reaching 110 million euros.
The small size of the economy, its export-oriented nature, and its high reliance on foreign investment are important characteristics of the Bulgarian economy. In terms of attracting foreign investment, the country has the advantages of low tax rates and low labor costs, as well as a good geographical location as a bridge between Asia Minor and Western European member states.
◆Policy suggestions
Having experienced four no-confidence proposals, all of which were successful, the Bulgarian government is expected to continue to rely on the support of “Ataka” in the short term to maintain government stability. But in the long run, the direction of the current government is full of uncertainty. In view of the profound lessons learned from the European debt crisis, Bulgaria has been pursuing austerity fiscal policies in recent years.
In the future, the country’s economic recovery is expected to accelerate, but some risk factors deserve attention. It is recommended to pay attention to the changes in Bulgaria’s political arena and grasp the domestic political trends in Bulgaria; be wary of political instability caused by “Ataka’s” changes in its stance towards the current government. In addition, Bulgaria is more dependent on Russian gas than Ukraine, and the alternative is to import gas from Azerbaijan and transship it through Greece. However, Azerbaijan and Greece are currently not yet complete in terms of relevant hardware facilities.
Uncertainty factors in Bulgaria’s economic development have increased. Domestic demand is sluggish, dependence on external markets has deepened, and the foundation for economic growth is unstable. If it wants to speed up, further policy adjustments and reforms must be implemented.
