While the crisis is far from over, some hopeful signs of global recovery are already on the horizon. The first positive signs will soon be perceivable in Europe’s emerging markets, too, although they will arrive significantly later than in other countries. Skeptics may say that talk of a “V-shaped” recovery is overly optimistic, especially since some indicators (e.g. unemployment) show further deterioration and investor confidence in the region remains extremely fragile. However, the economic crisis has changed the nature of competition between central European countries: It has touched off a new race for the confidence of the international markets. Factors such as flexible economic policy, financial stability, fiscal prudence, governmental stability and national image can prove fundamental in effective crisis-management. Past losers now have a chance to become future winners. However, each country has several “Achilles-heels” that can hinder its prospects for long-term growth. In our series (as a special issue of our Regional Risk Watch analyses) we summarize the most important risk factors that may hold back the economic recovery in six countries: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. We start our series with Bulgaria.

 

Summary

 

 

 

 

I. Corruption

High levels of political corruption, widespread misuse of public resources, sluggish and incompetent administration, and an ineffective, subservient judicial system are the most important risk factors that could delay Bulgaria’s recovery from the economic crisis.

 

Corruption continues to be one of the biggest problems. It has been impeding Bulgaria’s political and economic development since the beginning of its transition to a free market. After 20 years of democracy and almost three years of EU membership, crooked practices continue to hurt Bulgaria. According to Transparency International's 2009 Global Corruption Report, business people and country analysts view Bulgaria as the most corrupt country in the EU. The perception of corruption in Bulgaria had been declining slowly but steadily in the late 1990s, but then rebounded under the Bulgarian Socialist Party-led government from 2005 to 2009.

 

 

The negative impacts of rising corruption on Bulgaria’s economic recovery include:

  • Bulgaria’s European partners will lose confidence. Doubts about Bulgaria have already prompted the European Union to withhold development funds on several occasions. The economic effects of the delayed funding will probably become apparent only in the long term. Even so, Bulgaria missed an opportunity to bring in additional resources during the crisis and to improve its infrastructure.
  • High corruption levels could reflect negatively on the new center-right government’s efforts to implement reforms aimed at stabilizing the economy and improving the business environment.
  • Corruption makes it more expensive to do business in the country, harms free competition and strengthens the position of “unproductive entrepreneurs” over the ones who actually produce something. This will cause business conditions to deteriorate, especially for small- and medium-sized enterprises. These are supposed to be the backbone of the economy and could play a leading role in the country’s post-crisis restoration.

Another very important aspect of corruption in Bulgaria is vote-buying and election violations. Elections, especially local ones, have been marred by widespread electoral fraud. This frequently perverts the true will of the voters and allows the system to be manipulated by people who are pursuing business interests. This tendency leads to an extreme loss of voters’ confidence in the political system and seriously impairs the country’s democratic image among its international partners. If authorities cannot manage to cope with the problem through legislative changes and stricter controls, the loss of trust at home and abroad could have harmful consequences for Bulgaria’s democratic and economic development.

 

 

II. Minority Government

The risk of instability in the new minority government is also might hold back Bulgaria’s recovery. Such instability would certainly block the passage of indispensable reforms. The new cabinet has several policy options for hastening the crisis’s end, but all of them need stable parliamentary support:

 

1) Reforming the main state-funded sectors such as healthcare, education and the pension system, along with the tax system and public finances;

 

2) Implementing measures to address the problems that are arousing the concern in the EU, such as the need for an independent judicial system, guaranteeing transparent usage of EU funds, fighting corruption and halting the enormous conflicts of interest within the executive branch.

 

3) Implementing urgent anti-crisis measures to prevent the deterioration of Bulgaria’s financial health and to spur the revival of the economy.

 

The current GERB government has the support of 116 MPs in the 240-seat Parliament, making it 5 votes short of an absolute majority. Its leader, Bulgarian PM Boyko Borisov, decided to form a minority government rather than enter into a coalition. Opposition parties on both the left and the right currently have no interest in destabilizing the government because they are too busy with their own internal problems. GERB’s minority cabinet can probably count on stable governance for approximately 6 -12 months. By mid-2010, GERB will probably either need to form a coalition or to poach MPs from other parties. This, of course, may provide opportunities for the other parties to put pressure on GERB.

 

Decision-making in these hard times requires extraordinary political stability, not a government that has to run around looking for support for every single major issue. In order to achieve stability and to keep its public approval ratings high, the current government may be tempted to postpone the long-term reforms that will be unpopular in the short-term. In other words, they might trade fiscal discipline for social approval.

 

 

III. Drop in Foreign Investment

 

The stable and constantly rising flow of foreign investment into Bulgaria in the previous years was one of the main factors supporting economic growth. Between 2000 and 2008 foreign investment helped the country improve its balance of payments. It brought production and managerial know-how, spurred structural reforms in enterprises, opened new markets, and helped mitigate the country’s low savings rate.

 

Bulgarian businesses still are not independent, strong or developed enough to sustain the country’s economy on their own, especially with the global crisis making it hard to get foreign loans and pushing down demand for Bulgarian exports. The drop in direct investment, coupled with the withdrawal of investors who are already in Bulgaria, will seriously hamper the country’s economic recovery. The latest report from the Bulgarian National Bank shows that foreign investments in Bulgaria amounted to EUR 1.95 billion in the first eight months of 2009. This is less than half the amount invested in the same period of 2008, when foreign investors laid out EUR 4.61 billion in Bulgaria. Bulgaria's balance of payments shows a deficit of EUR 1.7 billion, compared with a surplus of 2.42 billion in January-August 2008. If the FDI flow continues to dry up, the Bulgarian economy will most probably experience serious difficulties in the coming months.

 

 

* Preliminary data; ** Preliminary data (Jan-Aug)

Source: Bulgarian National Bank