SOFIA (Bulgaria), February 26 (SeeNews) - Bulgaria has made sufficient progress towards upgrading the corporate governance framework of state-owned enterprises (SOEs) but shows limited progress in the effective supervision and enforcement of the anti-money laundering (AML) framework, the European Commission said on Wednesday.
Bulgaria is currently implementing a major reform of the corporate governance framework of SOEs in line with is ambitions to join the Exchange Rate Mechanism (ERM II), the mandatory training grounds for euro adoption, but SOEs dominate in the systematically loss-making and highly indebted utilities sector, meaning their performance remains a source of concern, the Commission said in its European Semester Winter Package.
Last week, the executive vice president of the European Commission Valdis Dombrovskis said in an interview for Bulgarian public radio that Bulgaria is preparing to enter the ERM II but the initial target date of April might be postponed by a few months.
The reform of SOEs will only be completed when the implementing acts of the law are prepared and put into effect, the Commission noted.
Bulgaria achieved some progress in the legislative framework as at the end of November it adopted a law aiming to amend the Anti-Money Laundering Act in line with EU rules in order to prevent the use of the financial system for the purpose of money laundering and terrorist financing. However, a national risk assessment completed in January highlighted a number of significant threats regarding the issue, the Commission said adding that the use of financial intelligence remains insufficient and the risk-based approach to supervision has yet to be implemented.
"Investigation of corruption cases has increased, but final conviction remains very limited," the Commission noted.
Bulgaria has also made sufficient progress towards ensuring the stability of its banking sector by reinforcing supervision, according to the EU's executive body.
"The Bulgarian National Bank (BNB) observes the implementation of the guidelines, recommendations and other measures approved by the European Banking Authority (EBA) with regard to the convergence of supervisory practices throughout the EU. During the reporting period, the BNB approved decisions for the application of a number of EBA guidelines," the Commission noted.
The banking sector is sound overall, but further steps are necessary concerning individual banks.
"Capital and liquidity ratios in the banking sector remained strong, supported by economic growth. [...] The comprehensive assessment of six banks by the ECB in the first half of 2019 revealed capital shortfalls in two banks (First Investment Bank and Investbank), which have been asked to implement capital plans by April 2020," the EU institution added.
The non-performing loan (NPL) ratio remains relatively high but have been steadily decreasing and the secondary market has become more dynamic.
Bulgarian banks' gross NPL ratio increased to 7.4% at the end of September from 7.2% at the end of June, according to BNB data.
According to the Commission, Bulgaria needs to focus on investment-related economic policy on research and innovation, as its R&D spending remains very low both in the public and in private sectors.
"The extremely low public R&D intensity (0.21% of GDP in 2018, the third lowest in the EU) is particularly concerning, and it has been on a mostly decreasing trajectory since 2000," the Commission said.
More and better targeted investment in digitalisation and in R&D can lead to productivity gains but attention should be paid to the governance and performance of the funded projects, the Commission said.
"Bulgaria’s growth prospects remain favourable but there is scope to further strengthen the overall resilience and competitiveness of its open economy," the Commission said adding that insufficient investment is holding back the modernisation of the country's economy.
Earlier this month, the EC lowered its forecast for Bulgaria's gross domestic product (GDP) real growth in 2020 to 2.9%, from 3.0% predicted in November and at the same time lifted its projection for the country's economic expansion in 2021 to 3.1% from 2.9% forecast previously.