Economy of Bulgaria

Moody’s upgrades Bulgaria to Baa1, changes outlook to stable from positive – 12 Oct 2020

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SOFIA (Bulgaria), October 12 (SeeNews) – Moody’s Investors Service said that it upgraded the government of Bulgaria’s senior unsecured and long-term issuer ratings in foreign and local currency to Baa1 from Baa2 and changed the outlook to stable from positive.

Moody’s also upgraded Bulgaria’s senior unsecured MTN programme rating to (P)Baa1 from (P)Baa2, it said in a statement on Friday.

One of the main drivers for the upgrade was the country’s progress towards euro area accession, which is expected to enhance institutional capacity and policymaking.

Moody’s also said in its statement:

“RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO Baa1

FIRST DRIVER: ENHANCED INSTITUTIONAL CAPACITY AND POLICYMAKING AS THE COUNTRY ENTERS A CRITICAL PHASE OF EURO AREA ACCESSION

The first driver of the upgrade is based on Bulgaria’s progress towards euro area accession and the associated strengthening of institutional capacity and policymaking. On 10 July 2020, the president of the European Central Bank (ECB), euro area finance ministers and the finance ministers and central bank governors of Denmark and Bulgaria decided to include the Bulgarian lev in the Exchange Rate Mechanism (ERM II)I, which is one of the final critical steps prior to becoming a member of the euro area. The announcement amid the coronavirus disruption results from a comprehensive reform programme. As of July 2020, Bulgaria had fully completed the actions to which the country committed in the seven key following fields: 1) banking union, 2) macroprudential supervision, 3) non-banking supervision, 4) insolvency framework, 5) strengthening of the anti-money laundering framework, 6) modernization of the framework of State-owned enterprises (SOE’s) in line with best international practices and 7) implementation of the law ratifying the agreement on the transfer and mutualisation of contributions to the single resolution fund. In parallel, the European Central Bank (ECB) and the Bulgarian National Bank (BNB) have established a close cooperation over bank supervision.

In Moody’s view, the successful completion of the reform programme speaks to the credibility of Bulgaria’s ambition to join the euro area. Moody’s believes that Bulgaria’s policy effectiveness has strengthened over the recent years. A key institutional setting, the currency board with the euro as a reserve currency is underpinned by sound monetary and macroeconomic policymaking, providing a stable framework for economic activity in a very uncertain international environment. The credibility of the currency board also relies on the country’s structurally prudent fiscal stance.

Going forward, Moody’s expects Bulgaria to continue to pursue sound economic and financial policies, as entering the euro area will require both sustainable economic convergence and readiness to participate in the banking union. On economic convergence, compliance with the convergence criteria is already advanced, as noted in the ECB’s 2020 convergence report.

From a macroprudential and banking perspective, Moody’s believes that the close cooperation between the ECB and the BNB and the inclusion of five of the largest banks operating in Bulgaria under the ECB’s supervision will further enhance the system’s regulatory environment and promote the adoption of best practices.

Finally, Bulgaria’s legal framework will be strengthened as national legislation adapts to fully comply with Article 131 of the Treaty in the areas of central bank independence, monetary financing prohibition and legal integration into the Eurosystem.

SECOND DRIVER: REDUCED EXPOSURE TO FOREIGN CURRENCY DEBT RISK, LARGE FISCAL RESERVES AND EXPECTATIONS THAT POSITIVE FISCAL AND DEBT DYNAMICS POST PANDEMIC WILL PRESERVE THE GOVERNMENT’S STRONG BALANCE SHEET

The second driver for the upgrade relates to Bulgaria’s strengthened fiscal credit profile despite the negative impact of the coronavirus pandemic. By entering ERM II, Bulgaria makes a major step towards the eurozone, an economic area with which the country has strong ties. In 2019, 80% of Bulgaria’s general government debt was denominated in euros. Under Moody’s Sovereign Ratings Methodology, a high share of foreign-currency denominated debt lowers our assessment of fiscal strength to reflect the risk of a sudden rise in interest costs and increase in debt stock in the case of a currency depreciation, thereby increasing the sovereign’s overall debt burden and decreasing its debt affordability. In the case of Bulgaria, the highly credible currency board that has been in place for more than two decades already mitigates this risk. Entering ERM II further decreases this risk, as it brings Bulgaria closer to its predominant currency of issuance.

The Bulgarian government has accelerated its structural reform programme and has made progress in areas such as healthcare, the judiciary, banking, energy and education. This successful reform implementation signals a return to political stability that will support real GDP growth.

The economy of Bulgaria is based on free market economic initiative .The economy is open, with a developed private sector and the limited number of state enterprises. Bulgaria is a member of WTO since December 1, 1996. From 1st of January 2007 Bulgaria is an EU member. Bulgarian economy is characterized by economic, political and financial stability. The country has a strategic geographical location, liberalized access to markets with more than 560 million users.

Since 1st of January 2007 Bulgaria has a 10% flat corporate tax, which is among the lowest in the European Union. Since 1st of January 2008 Bulgaria has also a 10% flat tax on personal income.

The average wage in 2009 was around BGN 600, almost double increase compared to 2006 when it was only BGN 354. The minimum salary for August 2009 was the lowest in the EU – € 123. In the second quarter of 2011 the average monthly wage increased to BGN699. Since 1st of January 2014, the minimum wage has increased to BGN 340. On July 1, 2015 – 380 leva. Since January 1, 2016 – 420 leva. / 214,70 EUR / Since January 1, 2017 – 460 leva/235,19 EUR/

                                   Energy Sector

In 2008, Bulgaria produced 44.83 billion kWh of electricity. From that, 29.9 billion kWh were consumed. For the same year, the electricity export was 5.407 billion kWh, while the import was 3.097 billion kWh. Oil production in 2008 was 3,357 barrels per day, while consumption in the country was 124,000 barrels per day. Proven oil reserves were approximately 15 million barrels (January 1, 2009). Natural gas production in 2008 was 218 million m3 , while consumption for the country was 3,350 billion m3. On January 1, 2009, proven natural gas reserves were approximately 5,663 billion m3.

                                             Chemical Industry

Heavy organic chemistry in Bulgaria includes production of fertilizers, sodium, acids, oil refining; production of synthetic and artificial fibre, rubber products, and plastics. The biggest producer is LUKOIL NEFTOCHIM BURGAS, which is a major fuel supplier for Bulgaria. The other large Bulgarian oil refinery, PLAMA, is based in the city of Pleven. It restarted its operation in 2011 and, for the moment, it concentrates on the production of bitumen. Light organic chemistry in Bulgaria includes production of acids, sodium, mineral fertilizers, phosphoresces, sulphur, pesticides, explosives, and others. A large producer in this industry is “Neochim” PLC, which is the successor of the Chemical Plant in the town of Dimitrovgrad in Bulgaria.

                                        Metallurgy

Metallurgy in Bulgaria is well developed. In 2010, it occupied 16 per cent of the total export for the country. Ferrous metallurgy had enjoyed growth until 2008, when the largest Bulgarian plant, “Kremikovtzi” LPC, ceased its operations. That year, steel production underwent a great fall and had a negative balance in kind and value. In 2008, the average monthly salary was BGN 1,021.

                       Food Industry

This sector covers the production of various food products, the canning industry, and the production of cigarettes and spirits.

               The canning industry is one of the oldest, most important, and most promising sectors of the Bulgarian food industry. It produces about 6 per cent of the total output, and employs about 9 per cent of the workers employed in that field. The Bulgarian canning industry processes mainly local foods and produces approximately 86-87 thousand tons of canned food.

The Bulgarian beer industry is also well developed. It includes 15 local brands. Approximately 30 varieties are sold on the market, which makes the beer industry a regional leader.

Rich in mineral water, Bulgaria bottles large quantities of it. The leading enterprises in the industry are located in the cities of Sofia, Bankya, Devin, and Hisar. In 2010, Bulgaria exported 10 million litres of mineral water mainly to Macedonia, Serbia, and Romania. The sector’s potential is not used to its full capacity. According to data from 2011, less than 24 per cent of the available mineral water in Bulgaria is used, while the rest of the water flows unused into different rivers and into the sea.

                              Mechanical Engineering

The Bulgarian shipbuilding industry is relatively well developed. Ships with different purpose and tonnage are produced, mainly in the leading shipyards in Varna, Rousse, and Burgas.

The automobile industry is a relatively new sector. In the recent past, quite a few brands of cars, such as Fiat, Renault, Moskvitch, and Rover, were produced in car plants in Lovech, Plovdiv, and Varna. As of 2011, the only operating car plant in the country is Litex Motors Bulgaria, which production capacity is 50,000 cars per year. It manufactures licensed by Great Wall Motors .

                              Foreign Trade

Volume

2009 2010

Export (FOB),BGN billion

22,88 30,44

Import (CIF), BGN billion

33,01 37,64

Balance, BGN billion -10,12 -7,20

                                          Geographical structure

In 2010, 60.9 per cent of import and 58.5 per cent of import were to and from other EU member states. The main importers of Bulgarian goods for that year were Germany (10.7%), Italy (9.7%), Turkey (8.5%), Greece (7.9%), Romania (7.5%), France (4%), Belgium (3.8%), and Serbia (3.5%). Bulgaria’s main imports for the period were from Russia (16.2%), Germany (11.6%), Italy (7.4%), Romania (7%), Greece (5.9%), Turkey (5.4%), Ukraine (4.2%), and Austria (3.5%). The biggest trade deficit balances were with Russia (BGN 5.25 billion), Ukraine (BGN 1.18 billion), and Germany (BGN 1.13 billion), while trade surplus balances were biggest with Serbia (BGN 681 million), Turkey (BGN 529 million), and Belgium (BGN 437 million).

———–Imports (2005)

A. Cars – 1860.4

Two. Medicines – 632.2

Three. Trucks – 506

4. Cotton fabrics – 345.6

Five. Coal – 314.3

6. Diesel fuel – 312.3

7. Tractors – 218.1 – (mostly from the U.S. and the Netherlands)

Eight. Anthracite – 191

9. Sugar – 113.3

10. Batteries – 109

——-Export

Exported mainly to: clothing, footwear, iron and steel, machinery and equipment, fuels.

                                           Tourism

The Bulgarian tourism is well developed. It generates 14 per cent of the country’s GDP (2007), as that percentage is expected to grow over time. The industry permanently employs about 4% or 140,000 people, as this number almost doubles in active seasons. 3.5 million and 4 million people visited Bulgaria for the sole purpose of rest and entertainment in the years 2003 and 2004, respectively. In 2004, most tourists came from Greece, Germany, and Great Britain. The country ranks third among EU member states in number of cultural monuments. The presence of 8,000 mineral springs makes the country an attractive destination for SPA and balneotherapy procedures. Despite that, 70 per cent of revenues come from maritime tourism.