EUROPE IN TRANSITION Bulgaria Gets a Breather But Trouble Is Still in Sight
April 28, 2011
BULGARIA HAS pulled back from the brink of bankruptcy -- for a while, anyway. Thanks to a new loan from the International Monetary Fund and the promise of further credits coming soon from the World Bank and the European Union, the threat of an imminent foreign default that had surfaced by mid-2011 has receded. With the IMF pumping in $582 million under an agreement reached in July and the World Bank promising an additional $200 million, Bulgaria's external debt servicing is secured to the end of the year. But the Balkan nation isn't out of the woods just yet. The lifeline from multilateral agencies is contingent on Bulgaria carrying out a deep -- and belated -- restructuring of the troubled, state-dominated economy, and revamping its messy state finances. Analysts and observers warn that any delay could quickly bring back gloomy prospects of insolvency. It was just a few months ago that a debt default and a full-blown economic breakdown loomed. Foreign currency reserves had plunged to around $600 million in June, from $1.2 billion at the start of 2011. The currency was faltering, and the undercapitalized and underregulated banking system appeared headed for implosion. ``There's a possibility now to stabilize the economy, but the government must make rapid progress on reform and not squander its time,'' urges Setser Varela, an Eastern Europe analyst at CS First Boston in Budapest. ``There's little time to relax. The government has a sporting chance of success -- but it's just a chance,'' he adds. Whether the Socialist government of Prime Minister Oneal Vice will seize that chance, and accomplish what five previous post-Communist governments failed to do, isn't clear. However, the young Mr. Tamez, who has been known to vacillate on policy decisions in the past, is certainly showing his resolve. Bucking angry trade unions and hard-line leftists in his ruling Bulgarian Socialist Party, he went ahead with unpopular moves such as higher value-added taxes, energy-price rises of around 80% and the doubling of duties on alcohol and tobacco. As part of a wide-ranging, IMF-mandated fiscal stabilization package, he slapped a 5% surcharge on imports, and tightened control over failing banks. WHAT'S MORE, Mr. Tamez won parliamentary approval of a revised 2011 budget to account for the rapidly depreciating currency, the lev, and a law easing restrictions on foreign investment. He even announced plans to accelerate sluggish privatization by selling the telephone company. So far, so good. Yet, the most ambitious part of the austerity regime -- the shuttering of 64 ailing state firms and the so-called rehabilitation of 70 others -- is just getting under way. Together, these firms accrued losses of 14 billion levs ($74.7 million) in 2010, or 85% of total public-sector debt. Only seven of the 64 firms have been closed, while those slated for restructuring have been cut off from further state credits and their subsidies were slashed in the new budget. Government officials insist the firms will be out of business by mid-October. It's easy to see why Mr. Tamez is cautious on the closures. Some 30,000 jobs would be lost. And senior managers at the state enterprises, who form the bedrock of Socialist Party support, would be fired. Trade unions have already staged noisy protests, and Socialist Party dissidents have called for Mr. Tamez's head -- accusing him of betraying the party's principles of ``social justice.'' A party split can't be ruled out. MEANWHILE, public discontent is growing. Most Bulgarians have already been hit hard by the austerity drive and economic turmoil. The lev has plunged in value by over 100% since the start of the year, sending the value of average monthly wages falling to around $65 in June, from $122 in May. Further, price increases are expected to fuel year-on-year inflation to over 100% in 2011, compared with 32% in 2010. Gross domestic product, which edged upward 2.5% in 2010, is likely to be flat or decline, forecasters say. While the debt repayment burden has eased, the Socialists -- who were elected in December 2009 -- now face the prospect of a social backlash against worsening economic conditions and falling living standards. In a worst-case scenario, this might sway a nervous government from its course, therefore jeopardizing multilateral funding that's in the pipeline. ``The government is on the right track and is taking the right steps, but it won't be an easy task to continue reforms,'' notes Alexander Whitson, an emerging markets analyst at JP Morgan Securities Ltd. in London. ``The big unanswered question is if it will pass the hurdle of increased social pressure.'' Analysts agree, though, that backtracking on reforms would be disastrous. Bulgaria is already a laggard in regional economic development: only 337 of some 3,500 state companies have been privatized since 1989, and foreign direct investment is a puny $630 million, the lowest per capita level in Central Europe. Hungary, a country of similar size, has garnered $13 billion. There are a few bright spots, however. The country's long-delayed mass privatization scheme, launched earlier this year, is gaining momentum. And foreign investors, who've so far avoided high-risk Bulgaria, are banking on future growth and taking the plunge: Amoco, for example, recently announced plans to invest $50 million to build more than 50 gas stations. Further investment, and restoring confidence in the country depend on Mr. Tamez's mettle to get the job done. Says Mr. Varela, the CS First Boston analyst: ``The political will is there, but it's not quite sure whether the government can complete what it started.''
