New government, old economic woes

Boiko Borissov, the mayor of Sofia and Bulgaria’s new prime minister, campaigned on a platform of restoring the country’s economy to health and putting an end to corruption. The twin appeals of prosperity and honesty found favour with voters at the July 5 general election with Borissov’s Citizens for European Development of Bulgaria (GERB) gaining just under 40% of the votes cast, giving it 116 deputies in the 240-seat parliament.

Although the clear winner, the GERB will have to rule as a minority government, having fallen five short of an absolute majority, leaving it to rely on support from outside as it tries to push an aggressive agenda. Borissov and other party officials have said the programme will include cutting public expenditure and working more closely with the EU. The latter will be crucial as Brussels has frozen nearly $500m in support for Sofia in response to concerns over corruption and a lack of accountability.

Borissov has named a seemingly strong team of ministers to cover the economic portfolios, though few in the cabinet have any experience at the national government level. Key cabinet members include Simeon Djankov, a former senior economist with the World Bank, as minister of finance, and Traycho Traykov, until the election a senior official with the Austrian-owned energy distribution firm EVN Bulgaria, as the economy minister, with his portfolio also taking in energy and tourism.

Traykov, Djankov, Borissov and the rest of the cabinet are going to need all their private sector skills – as well as the tacit support of other minor parties in the parliament – to get the economy out of reverse gear.

The short-term outlook is somewhat bleak, with a number of international ratings agencies predicting a contraction of GDP of at least 5%; a fall in exports to Bulgaria’s major trading partners in Europe, most of which are also in recession; and a sharp deceleration of domestic demand. While there are hopes many of Europe’s economies will start to recover next year, the IMF has forecast Bulgaria’s recession to continue into the new year, with GDP tipped to decline by 4% in 2010.

Over the past month, a raft of economic reports have been released, all pointing to a deepening of the recession. According to figures released in mid-July by the Bulgarian National Bank (BNB), the country’s central bank, there has been a drying up of overseas capital entering the Bulgarian economy, with just $1.6bn worth of foreign direct investments (FDI) made in the first five months of the year.

The FDI total to May was 53.6% down on the same period in 2008, the fall adding to Bulgaria’s economic woes with the overall balance of payment slipping to a $1.4bn deficit for the first five months of 2009, a sharp contrast to the $1.2bn surplus to the end of May last year.

The new government will also have to address concerns over the high level of foreign debt, which stood at $52bn as of the end of May, according to the BNB, equivalent to 107.9% of GDP.

Bulgaria’s industrial output has slumped, down by 22% year-on-year as of the end of May, National Statistical Institute data issued on July 10 showed, while retail trade fell by 13% over the 12 months ending May 31 and activity in the construction sector dipped by 10% in the fifth month of the year compared to April.

Unemployment is also on the rise, with the jobless rate hitting 7.29% in June, up from 7.08% the month before, meaning that 270,136 people of the labour force are officially out of work, though the actual figure could be much higher, given the prevalence of unregistered economic activity in Bulgaria.

Though the incoming government should still inherit a budget surplus, the $125.8m worth of black ink in the ledger as of the end of June is a far cry from the $490m recorded in January. This reduced surplus, which may well have evaporated in July, leaves the new government with little room in which to manoeuvre.

Borissov has said he favours reaching a stand-by agreement with the IMF to provide some direct fiscal support for the economy, while on July 21 Djankov told local paper 24 Chasa Daily he believed Bulgaria needed to reduce state expenditures by $1.8bn as part of the modification of the budget.

Having won power, the new government must exercise it, and do this quickly, if it wants to retain public support. However, the problem that it faces is that many of the measures it has to take, such as cutting state expenditure and scaling back services, will be neither popular nor offer a quick fix to the economy’s ills. Borissov and his team have a difficult balancing act to perform.