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Hamstrung by recession

Author: Alex Bivol Date: Fri, Jan 08 2010 1 Comment, 5944 Views
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Looking back at Bulgaria’s economy in 2009, one is tempted to break the year into two slightly unequal halves, depending on which government was in charge. But the differences between the policies pursued by two different cabinets were similar inasmuch as neither found an adequate response to minimise the impact of the economic recession or to revitalise Bulgaria’s economic recovery.

The chickens came home to roost in 2009, as more than a decade of economic growth came crashing down with a bang and the excesses that fuelled the boom, their potential drawbacks being paid little heed, could not be ignored any longer.

But while it is easy to point a finger at the missed opportunities during the decade of sustained growth, the year 2009 brought further proof, if any was needed, that Bulgaria’s economy was not an island, of stability or otherwise. The same opening of borders that led to strong growth after the 1997 crash has left the country’s economy vulnerable to the current recession, but also will be largely responsible for the recovery.

Head in the sand?
Without doubt, Bulgaria’s economy was not helped by the poor planning at the end of 2008. Despite a hasty redrawing of the 2009 Budget, it still set unattainable goals for economic growth and revenue collection.

The tripartite government of socialist prime minister Sergei Stanishev envisaged 4.7 per cent economic growth in its 2009 Budget and was roundly criticised for being unrealistic both at home and abroad. Somewhat incongruously, however, that was not the figure used to draft the Budget spending, a more cautious 2.1 per cent estimate being used instead.

The use of this conservative figure won the government a small amount of praise from the International Monetary Fund (IMF) and the European Commission, both of which were moderately optimistic early in the year that Bulgaria would avoid a recession and post mild economic growth.

The ruling coalition, however, gave no satisfactory answer to why it had used two figures in the first place. Although Stanishev and government ministers maintained for several months their mantra that Bulgaria was an island of stability, largely untouched by the unfolding global economic and financial crisis, the transcripts of cabinet meetings showed that in private the cabinet discussed the crisis more candidly than ministers did in the open.

However, the government did little to reduce the tax burden, keeping the high target of Budget revenue despite early signs that it would be missed and putting its hopes of alleviating the impact of the recession on its ambitious public spending programme, which exceeded 5.1 billion leva.

Even after shrinking revenues forced the cabinet to set aside 10 per cent of the funds allocated to each ministry in a move described as "creating a buffer" against the looming prospect that revenue targets would not be met, the ministries were left to manage their spending individually, instead of a centralised push to eliminate excesses in any specific areas.

Ministries were thus able to sign contracts reportedly worth more than a billion of leva for which they did not have the money to pay, as the new Government of Prime Minister Boiko Borissov quickly found out after taking office in July.

Debts piling up
Leaving aside the question of to what extent the flurry of these contracts amounted to a concerted effort to cripple the ability of the incoming Government to pursue its own policies and how much of it was due to incompetent management decisions, there can be little doubt that the Stanishev cabinet’s attempts to put a positive spin on the economy in the final months of its term did more harm than good.

Early in the year, reports surfaced claiming that as much as half of the 900 million leva of the Budget surplus recorded in January, which appeared to vindicate the cabinet’s Budget calculations, was due to delayed value-added tax (VAT) refunds. The money boosted the Budget revenues and bottom line, masking the deficit, but also made it increasingly difficult for businesses to meet their business plans.

By the end of June, with tax authorities reportedly putting no stop to the practice, the Budget surplus had shrunk to 173 million leva, while delayed VAT refunds had reached 700 million leva, according to new Finance Minister Simeon Dyankov.

Dyankov took office saying that Bulgaria faced a Budget deficit of 2.5 billion leva at the end of 2009. He immediately cut 15 per cent of the ministries’ budgets to save 1.16 billion leva and targeted 1.2 billion leva in additional revenue from improving excise duties collection.

By the end of the year, the Cabinet managed to halt the slide, posting small surpluses in October and November – December data will be available at the end of January 2010 – to reduce the consolidated Budget deficit below the 500 million leva target the new Government set.

Just like the numbers announced by Dyankov’s predecessor, Plamen Oresharski, this figure tells only part of the story. The Government’s short-term debt to the private sector has ballooned over the second half of the year, with different estimates placing the figure at between one billion and two billion leva, a debt that Borissov vowed to begin repaying in January and February 2010.


No bailout
Despite the Government’s difficulties in paying the bills, it refused to call in the cavalry and, unlike neighbouring Romania and Turkey, has not held any official talks about a possible bailout with the IMF and other international financial institutions, even though Borissov’s economic team was among the proponents of such a move during the elections campaign.

Without the need to cap its spending, a requirement that the IMF would likely impose before disbursing any funds, the Cabinet has a free hand in choosing how to fight the effects of the global recession, but its ability to do so is shackled by the lack of money.

Dyankov has refused repeatedly to use even a small amount of the 8.1 billion leva accumulated in the country’s fiscal reserve to inject cash into the economy by paying off some of the Government’s debts to the private sector. Dyankov said in December that it would be the fastest way to pay back what the Government owed companies, but remains reluctant to do so, instead choosing to focus on finding other possible sources of financing, including the issuing of domestic bonds and foreign loans.

But while Bulgarian businesses would welcome any move that would rapidly boost their cash flow, it is debatable how much even as large a sum as one billion leva would help in unclogging the bottlenecks in the private sector.

According to data from the Bulgarian Industrial Association, one of the biggest employer bodies in the country, inter-company debt outside the financial sector was 90 billion leva at the end of 2008 and the figure was estimated to have increased by 30 per cent in 2009. On top of that, firms owed a further 70 billion leva to banks and other financial institutions, as well as outstanding payroll payments to staff – at the end of 2008.

The lack of efficient and quick debt collection procedures to settle disputes between creditors and insolvent companies has contributed to the swelling of the inter-company debt, while at the same time increasing the risk of chain bankruptcies, an outcome long predicted by some business associations that is yet to materialise.

Neither has unemployment ballooned to the same extent as some employers’ unions had forecasted, reaching 8.66 per cent at end-November. However, the figure only includes people who register for unemployment benefits and the actual number of people out of work could be far greater.

Moving forward?
By far, the longest saga of 2009 was the issue of Bulgaria’s (still) ongoing energy projects – and judging by developments so far, it looks set to rival some of day-time television’s top titles in terms of length and excitement, or lack thereof.

The three contracts signed by the two countries in January 18 – for the transit of the South Stream gas pipeline, the construction of the Bourgas-Alexandroupolis oil pipeline and the Belene nuclear station – dominated bilateral relations with Russia, prompting sporadic flurries of diplomatic efforts, which in the end yielded little results. No sense killing the drama, after all.

Better yet, a new plot line was added into the mix early in the year, when the pricing dispute between Moscow and Kiev left Bulgaria with no gas for two weeks, most of that period coinciding with a cold snap. The surprising news was that Gazprom could not be held liable for the interrupted service and subsequent damages because the latest contract, signed in 2006 and in effect up to 2011, contained no punitive clauses.

The contract itself was not made public by the Stanishev cabinet, but its contents were leaked to the media. The issue of renegotiating the contract was brought up in bilateral talks several times during the year, with Sofia insisting that Gazprom delivers the gas directly rather than through joint ventures it partially owns, but the Russian state monopoly has refused to break with its usual modus operandi.

Instead, Gazprom asked that Bulgaria allows the use of its existing gas grid for the infrastructure of South Stream, which was immediately seen in Sofia as yet another attempt by the gas giant to gain a stake in the grid, a move even the sympathetic socialist-led cabinet refused to sanction.

The other Russian company with a big stake in the proposed projects – Atomstroyexport, which has a four billion euro contract to build the two 1000MW units of Belene nuclear power plant – did not make much headway with its efforts to speed up work and get paid.

Bulgaria would not commit Budget funds to the project and with BNP Paribas coming up empty-handed in its attempts to secure a syndicated loan for the construction, the project sustained another hit with Belgium’s Electrabel saying in February that it was no longer interested in continuing talks to potentially buy into the project.

Russia’s government, which set aside 3.8 billion euro for a possible loan in 2008, no longer had the money, nor was it immediately clear under what conditions could the loan be made, as several ministerial meetings to that end were inconclusive.

But the biggest setback was suffered by the Bourgas-Alexandroupolis oil pipeline, which will now have to wait until as late as mid-2011 for an environmental assessment impact after conservation groups lobbied against the current plans to build the pipeline pumping station out at sea, instead of on land.

And to further complicate life for Moscow, the EU-backed Nabucco gas pipeline finally saw the participating governments sign in July the accord laying the foundations for the project. The agreement detailed issues such as transit and taxes in the five countries that the pipeline will pass through, but not, as skeptics eagerly pointed out, where the gas would come from and how financing would be raised to build the pipeline.

Given the stated desire of Bulgarian politicians for the country to become the "energy centre of the Balkans", however, expect these storylines to return in force in 2010 in a sideshow to Bulgaria’s efforts to halt its recessionary slide and relaunch the economy.

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