AT A GLANCE – Bulgaria’s Economy Grows Strongly In 2008, But Outlook For 2009 Is Bleak

It also has a plunging equity market, tightened lending by banks and much trepidation among businessmen, politicians and citizens about what the global financial turmoil will mean for the country next year.

Bulgaria’s economic growth accelerated to 7.0% year-on-year in the first nine months through September, beating expectations and faster than the 5.9% growth in the same period a year ago. The country’s jobless rate fell to record low levels, reaching 5.85% in November, compared to 6.62% a year ago.

All government, industry, business officials and analysts agree that 2009 will be a difficult year as the actual effects of the crisis impact the economy. Real estate and construction have already been hit, with some 150,000 building workers expected to be laid off next year.

Pessimists forecast economic growth plunging to zero or even sub zero levels and the jobless rate rising to double digits next year. The positive news is that inflation will fall on diminished demand and that the crisis will ultimately prove healthy for the economy in general as poorly managed businesses will fail.

ENERGY

At the turn of the year, Bulgaria, a former Soviet Union satellite, signed three major energy deals during a visit by Russia’s then President Vladimir Putin.

Bulgaria assigned a 3.99 billion euro ($5.7 billion) contract for the construction of its second nuclear power plant to Russia’s Atomstroyexport in January. Construction of the 2,000-megawatt plant, to be located in the town of Belene, on the Danube river, is scheduled to kick off next spring and the first 1,000 MW reactor at the plant is planned to be put on stream at the end of 2013 or in early 2014, and the second a year later.

The government in Sofia picked German group RWE as a strategic partner to the state, which will hold 51% in the project, and a joint venture deal was signed just ten days ago. The deal was initially expected to be signed in October but it took some time for the German company to make up its mind whether to enter the project after environmentalists opposed the Belene project.

Now the German group is in talks with Belgian Electrabel, owned by French power giant GDF Suez, which was ranked second, to share half its 49% interest in the project.

During Putin’s visit, Bulgaria, Russia and Greece inked a deal for establishing a project company that would build an oil pipeline with a capacity of up to 50 million tonnes of Russian crude from Bulgaria's Black Sea coast to Greece's Aegean coast, bypassing the tanker-clogged Bosphorus Straits. Construction of the pipeline is scheduled to start by end-2009 and costs are estimated to total around 1.0 billion euro.

Also in January, Bulgaria and Russia signed an agreement to set up a 50/50 joint venture that would build and manage the Bulgarian section of the multi-billion euro South Stream pipeline, designed to carry Russian natural gas to western Europe via Bulgaria.

Bulgaria, which was a leading energy power in southeast Europe before closing two pairs of reactors at its sole nuclear power plant Kozloduy, has a great ambition to regain this role. Apart from the Belene project, the country set up in September an energy megagroup incorporating assets worth some 8.5 billion levs of five key state-owned companies – of nuclear power plant Kozloduy, gas company Bulgargaz, power grid operator NEK, coal-fired power plant Maritsa East 2 and the Maritsa East coal mines.

The government may also fold the country’s largest heating utility Toplofikatsia Sofia into the energy megastructure, Bulgarian Energy Holding, after it took it over from its previous majority shareholder, the Sofia municipality.

PRIVATISATION

Bulgaria moved a step towards speeding up the privatisation of its tobacco group Bulgartabac, a former monopoly, which has been losing market share to foreign competitors. Parliament scrapped the group’s privatisation plan drafted in 2003 and removed the group from the list key state-owned companies critical for national security, whose sale must be endorsed by the legislature. Political wrangling has been delaying the group’s privatisation for years.

However, Bulgartabac succeeded in selling majority stakes of two of its cigarette-making units, Slantze Stara Zagora and Plovdiv BT, through the bourse in Sofia in July, for a combined 49.1 million levs ($35.8 million/25.1 million euro).

Now the holding group, which is 80% owned by the state, comprises the holding company, two cigarette-making factories, a tobacco processing factory, a trading arm and several idled factories.

Sofia sold 70% of maritime shipping company Navibulgar, one of its key state-owned assets, to German-led consortium KG Maritime Shipping for more than 440 million levs. The consortium pledged to invest 780 million levs in Navibulgar in the next 10 years, aiming to make it the biggest maritime carrier in the Mediterranean area.

In early 2008, the country hoped to dispose of its few remaining state-owned heating utilities after it sold such companies in most of its big cities in an attempt to further liberalise its energy market after joining the EU. It launched the privatisation tender of the heating utility in the northeastern town of Shumen but cancelled it as no investors showed up. It is still unclear whether it will repeat the tender. The asset selling body is preparing also the privatisation of the heating utility company in the western city of Pernik.

BOURSE

The year 2008 was painful for the Bulgarian equity market, which was ravaged by the financial turbulence which swept across the globe. The benchmark SOFIX index has lost 80% since the beginning of the year, after skyrocketing in November last year. The market was initially abandoned by foreign institutions and subsequently by smaller local investors who exited positions in panic sell-offs.

Unlike 2007, when Bulgaria’s stock exchange saw a boom in initial public offerings (IPOs), 2008 was marked by delayed listing plans. About 20 companies became listed on the Bulgarian Stock Exchange last year and another 60 firms said they planned to go public. However, the adverse economic conditions persuaded most of them to postpone their flotations on the domestic bourse until better times return.

CONSTRUCTION

The final months of 2008 proved tough for the construction and real estate sectors, which were the first to be hit by the credit crunch, with funds for new projects hard to come by. While investors have been proudly announcing multi million euro projects for residential, office and retail construction in the previous year, now they are quietly putting their mega projects on hold.

Estimates of the construction chamber show that projects worth 2.0 – 2.5 billion levs have been frozen and it is uncertain when they will be relaunched. As a result 150,000 workers in the sector, including those illegally employed, are expected to be laid off next year.

BANKS

Despite bank and government officials assuring the public of the soundness of the banking system, the first alarm signals have been sounded. Local banks claim to have clear balance sheets, not contaminated by the toxic high-risk debt instruments which hit many banks in more devloped economies. However, domestically-registered banks have tightened lending and started campaigns to attract deposits.

Lending growth has started to slow after surging 64% last year. Banks’ credit portfolio as of the end of November rose 39.2% on the year.

To help local commercial banks cushion the impact of the crisis, the central bank allowed commercial banks to be more flexible, easing their access to liquid assets. Last month the central bank cut the minimum reserve requirement to 10% from 12% as of December 1, while a month earlier it relaxed the reserve requirements saying it would consider half of the cash banks hold in their vaults as reserve assets, aiming to raise the liquidity of the country's banking system amid the global liquidity shortage.

The central bank is also considering more changes in its regulations, aiming to soften the impact of the crisis on local banks, like its capital adequacy regulations and its provisions regulation allowing commercial banks be more flexible in managing their portfolios and in their relations with clients when re-negotiating loan repayment terms.

(1 euro = 1.95583 Bulgarian levs)