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BULGARIA


  
  

 

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Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 19,859 15,608 13,600 69
         
GNI per capita
 US $ 2,130 1,790 1,650 106
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 155 - (27/04/10)

President narrowly escapes impeachment
Bulgaria's ruling right-wing party has failed to get enough votes to impeach President Georgi Parvanov. But it nearly did.

The parliament on April 21 voted 155 to 72 in favour of impeachment, but the motion needed more than 160 votes, or a two-thirds majority to proceed. It was the first ever impeachment motion in the nation's history.

The ruling GERB party has been at odds with the Socialist Mr. Parvanov because of a political dispute between the president and Finance Minister Simeon Djankov. Mr. Parvanov had called for Djankov's resignation after Djankov appeared to disparage the president on a television talk show earlier in April. The GERB had accused the president of violating the constitution and meddling in government affairs.

The president's role is mostly ceremonial, and many legal experts said even if the motion had passed, it would likely have been rejected by Bulgaria's constitutional court.

In the eye of the storm
The Greek crisis has triggered fears about the stability of the euro zone and concerns that it may end up foiling Bulgaria's aspirations to join the euro, despite the country's budgetary rigour. Could the debt crisis erupting across the currency bloc harm Bulgaria's euro-zone bid?

There has been considerable discussion of whether the Greek crisis is likely to affect the path of the new EU member states towards economic and monetary union. EU policymakers, who had already shown a tendency towards a very strict application of the Maastricht criteria for euro adoption, will now cast an even warier eye not only on these criteria, but on a broader set of parameters. These are likely to include the sustainability of external balances and broader measures of the economy's performance and competitiveness.

In the wake of the fast-and-loose approach to statistical reporting adopted by Greece, EU bodies will also place the statistical releases of EMU applicants under more intense scrutiny, particularly with regard to their fiscal accounts.

Bulgaria's recent fiscal prudence is a major positive for its bid to enter ERM II and then adopt the euro. Nevertheless, it is no secret that some established euro members have concerns about admitting faster-growing economies to the euro club, owing to the perceived greater risk of imbalances, which may undermine confidence in the single currency. The Greek crisis is likely to exacerbate these cautious tendencies. In Bulgaria's case, the current-account deficit and the level of external debt are likely to be scrutinised. The current-account deficit has declined dramatically in 2009 but remains large as a percentage of GDP, and EU policymakers will be worried that the deficit will increase again once GDP growth resumes at faster rates. The Bulgarian convergence document has tried to allay this fear, by emphasising the structural reforms designed to enhance competitiveness and productivity.

Within eastern Europe Bulgaria is probably the most vulnerable to negative spill-over effects from the crisis in Greece, owing to strong trade and investment links with Greece and the substantial stake Greek banks have in Bulgaria's banking sector.

Greece needs to severely tighten its fiscal policy and, whatever support is forthcoming from the EU, the country is at risk of remaining in recession throughout 2010 at least. Bulgaria is unlikely to be immune to the hardships in Greece. Greece has been one of the main sources of foreign direct investment in Bulgaria and Greek demand has been accounting for around 10% of Bulgarian exports in recent years. Therefore, there is a risk that lower trade and investment could shade a few decimal points off Bulgarian real GDP growth in 2010.

More serious perhaps is the risk of a damaging retrenchment by the Greek banks operating in Bulgaria. Greek banks account for almost 30% of total assets and 40% of loans in the Bulgarian banking system (higher ratios than in Romania, or other eastern European countries), which has experienced a sharp slowdown in credit growth in 2009 and an ongoing rise in non-performing loans. While the Greek banks will not wish to damage their reputational credibility in the Bulgarian market, there is a strong risk that pressure in their home market could drive them to limit credit activity abroad, including Bulgaria. This would certainly knock the moderate recovery in credit growth forecast for Bulgaria in 2010 and as a consequence undermine economic recovery. One can forecast an anaemic recovery in Bulgaria in 2010, with real GDP growth of 0.6%. However, the combination of lower trade and investment, together with weaker credit growth, flowing from the Greek crisis could cause the Bulgarian economy to remain flat in 2010 or even fall back into recession.

The initial stage into the ERM 11
At the end of January 2010 the government approved and submitted to the European Commission Bulgaria's convergence programme up to 2012, as required at the initial stage of applying for membership of the EU's exchange-rate mechanism (ERM II). The programme states that the main medium-term objective of Bulgarian economic policy is euro area membership, in order to enhance macroeconomic stability and boost investor confidence in the Bulgarian economy. To this end the government is seeking entry into ERM II. After securing ERM II membership Bulgaria would have to remain in fulfilment of the Maastricht criteria for at least two years before euro adoption.

Bulgaria must now wait for the EU evaluation of its convergence programme. Meanwhile, the Commission will produce a detailed report on the Bulgarian economy and its readiness for ERM II. The Bulgarian government will hope to join ERM II later in 2010, although PM Borisov has admitted that the aim to adopt the euro by 2013 will be a struggle. One can anticipate that Bulgaria may get to adopt the euro in 2014 at the earliest.

Fiscal stability
One issue on which Bulgaria can be fairly confident is fiscal policy. In 2009 the country posted an estimated general budget deficit of 0.8% of GDP, which was the smallest deficit among EU countries.

Given the currency board arrangement, fiscal policy, rather than monetary policy, is Bulgaria's main policy weapon, and in recent years surpluses have been the norm. According to the convergence programme, fiscal policy in the medium term will aim for balanced budgets in order to ensure the sustainability of the public finances.

Should Bulgarian policy makers be cautious about entering the single currency club? What are the risks if the country adopts the euro too early?

In general, one risk for a country of joining the euro is to lose control over competitiveness, because you can't devalue your currency. In Greece, for example, wages rose very quickly, in part due to expansionary fiscal policy. This fuelled private consumption and a large current-account deficit. However, Greece was unable to act against this with monetary policy by devaluing.

In Bulgaria, though, the lev has been pegged to the euro for more than a decade and so Bulgaria has not been using currency devaluations to maintain competitiveness. Therefore, this risk is not so much of an issue for Bulgaria, as it is for the likes of Poland and the Czech Republic, which have floating exchange rates. Nevertheless, in a hypothetical situation of diminishing competitiveness in several years time, it would be even more difficult to leave the euro than abandon the currency board arrangement.

Another risk from adopting the euro too early stems from insufficient real convergence, as reflected in the significant disparity of income and price levels between Bulgaria and the average for the EU. If this is the case then adoption of the euro can lead to price rises which people are not prepared for. This issue was recently raised with regard to Bulgaria by Jorge Fuentes, Spain's ambassador to Bulgaria.

Although the process of adopting the euro is based on defined economic criteria, it would be nave to think that political sentiment is therefore unimportant. It is a political process also and Bulgaria's relations with the EU since membership in 2007 have not been smooth. Nevertheless, the advent of the new government in July 2009 provided a platform for better relations with the EU and Bulgaria needs to capitalise on this.

At present a collapse of the euro is highly unlikely, as are expulsions from the euro zone. Nevertheless, the magnitude of this crisis for the EU should not be underestimated given the questions that it raises about the inadequacies of the economic and monetary union as it currently operates.

 


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