Bulgaria: Success Story for the Balkans
Charles H. Movit Vice President, PlanEcon, Inc.

Outline

• Growth Slows in 1999, Resurges in 2000
• Exports Recovering But Aggregate Demand Growth Generates Payments Imbalances a Progress on Restructuring
• Credible Policies Key to Continued Recovery
• Politics: Continued Mandate for Reform? a Our Medium-Term Forecast

Economic Reform Program Has Achieved Macroeconomic Stability

Annual Change in CPI (in%)

Progress on stabilization has been followed by economic recovery

Annual Change in GDP (in%)

Currency Board Has Been Critical, But There are Trade-offs

• Bulgarian currency board limits policy options
• Money supply determined by level of official foreign exchange reserves
• No direct lending by central bank to budget or refinancing of banks.
• Exchange rate inflexible
• Exporters have been complaining, but euro weakness has provided respite

Turnaround in aggregate demand generates trade imbalances, payments pressures

Current Account Balance ($mil.)

Rebounding imports swamp export performance

• Small, open economy
• Requires large-scale imports of energy and raw materials
• Strong demand for imported machinery, intermediate goods has proved less sensitive to price movements than exports
• Export performance disappointing in key markets

Merchandise trade gap reaches $1 bn in 1999-2000

Trade balance ($mn)

Bulgarian FDILow Compared with...
USD Per Capita

Domestic Politics Impede Restructuring

• Insider privatization long a preferred option
  • Hope to preserve jobs at major employers
  • Entrenched managers of state enterprises have enjoyed strong political clout
• Lack of transparency countenances widespread corruption a Government often unrealistic concerning asset values
• Special concerns for infrastructure, utilities

Financing the Current Account Deficit Is Problematic

• Bulgaria, already burdened with heavy debt service, unable to significantly expand net debt
• Needs cut by FDI inflow, but payments due on principal and interest exceed $1 billion annually
• IMF and extraordinary BOP support has been critical for reserves, economic recovery

Reluctance to Privatize, Restructure Also Handicaps External Adjustment

• Inefficient, large-scale, state-owned enterprises unable to compete in key export markets, losing domestic market share to imports
• Slow pace of privatization has dampened domestic investment
• Failure to sell companies has constrained FDI, slowing productivity growth
• Investment environment delaying injection of capital, know-how

Despite headline transactions, Bulgarian privatization fails to meet targets

• Management groups continue to win tenders with little or no cash
• Government has rejected offers for large, bankrupt firms because bids too small, include too many layoffs
• Many firms fail to attract bidders a Major tenders in 1999-2000 still highly politicized
  • BTC, Neftokhim Refinery, Petrol
  • Restructuring of Infrastructure Begins

Continued Confidence ofIFIs and Foreign Investors Underlie Growth Forecast

• Bulgaria critically dependent on IMF credit to support BOP, on World Bank for assistance in restructuring key sectors
• Requirements for EU accession process provide blueprint for restructuring;
• Prospect helps attract FDI o Without these resources and programs, economy returns to stop and go

Bulgaria: Rostov government earns high marks from most for staying the course

• Ruling UDF has relied on clear mandate to implement program negotiated with IMF, reinforced by success of currency board
• With opposition in disarray, UDF had convinced electorate of unique capability to govern
• Administration should change style and substance, do more to accelerate, increase transparency of privatization

Rising Unemployment: Evidence of Restructuring, Source of Dissatisfaction

Registered Unemployment Rate fin%)

Are there credible challenges to the continued mandate for reform?

• Initial phases of restructuring create social tensions
• Corruption allegations lead to new calls for no-confidence vote, but extreme left has no hope
• Threat to UDF comes from within-a split in the progressive forces would weaken resolve
• Elections-now scheduled for April 2001

Our Medium-Term Forecast Is Relatively Optimistic

• Restructuring proceeds, currency board remains in place
• Growth accelerates, then moderates as easy gains are made
• Export recovery, investment, drive growth
• Service sectors continue to lead

Restructuring, foreign investment will help to reduce payments pressures

Current Account Deficit (% of GDP)

Risks to the medium-term forecast:
alternative scenarios

• External Environment-
  • Demand for Bulgarian exports in key markets fails to materialize
  • Balkan Region engulfed in strife again
• Domestic Environment
  • Further erosion of support for reform politics weakens agenda
  • Despite low inflation environment, private sector fails to thrive