Bulgaria and the Eurozone

Bulgaria Revamps Euro Bid Plans, Eyes H2 11 for ERM II

Bulgaria's center-right government revived its plans to apply to join the bloc's exchange-rate mechanism, the so-called Eurozone waiting room, after it was forced to drop the euro bid in April over a larger than expected 2009 deficit.

"Bulgaria is likely to apply to join ERM II in the second half of 2011 after it has demonstrated that next year's budget deficit will fall below the European Union's ceiling of 3% of gross domestic product in line with the Maastricht criteria," Finance Minister Simeon Djankov said on the sidelines of the Ecofin council meeting in Brussels in the middle of November.

Earlier last year the government touted plans for the country to join the euro-zone entry mechanism ERM II no later than next year with adoption of the single currency slated for 2012. It had to put off plans to join the euro area entry mechanism after its 2009 revised budget gap exceeded the 3% EU threshold.

Joining the exchange-rate mechanism was assigned top priority for this year by the new Bulgarian center-right government, which was the reason why it stuck to tight financial policy at the end of 2009 and delayed payments to businesses in a bid to keep low the budget deficit.

Minister Djankov, a World Bank economist, hoped to offset a possible reluctance to admit Bulgaria into the ERM, stemming from the global crisis, by garnishing the application with a targeted balanced 2010 budget, small 2009 deficit and laws overhauling the inefficient health-care and social-security systems.

Entry into the so-called Eurozone waiting room would have brought Bulgaria closer to the umbrella of the euro region and the protection of the European Central Bank and was conditional on whether the new government would succeed to restore Brussels trust and the budget deficit that the country has posted.

Countries must be members of ERM II for two years before they can formally join the eurozone.

The lev is already linked to the euro in a currency board that keeps the Bulgarian currency at 1.9558 to the euro.

Djankov Slams EU, Says Euro Zone to Benefit from Bulgaria

Bulgaria's Finance Minister Simeon Djankov, speaking on the BBC, has criticized the European Commission, and the European Central Bank for failing to prevent the crisis of the euro zone.

His criticism for the key EU bodies emerged after Ireland recently became the second Euro Area country after Greece to seek an EU-IMF bailout.

"Once you design a new currency you need the institutions to go with it and the recent troubles showed we don't have the institutions. Nobody is daring to ask what happened to the current institutions," he told BBC World Service's Business Daily at the end of November.

He also slammed Eurostat, the EU statistics office, for failing to raise alarm over the state finances of struggling euro zone members.

"Didn't they know about Greece's problems, the Irish problems? They seem to not have bothered doing as much analysis as they should. The institutions themselves need some health checks and then some changes," he declared in a rather categorical manner.

At the same time, however, Djankov, a former senior World Bank expert and a globally renowned economist, confirmed Bulgaria's course to seek accession to the euro zone, making it clear he believed this would actually benefit the Euro Area because of the fiscally conservative policies that the Bulgarian government follows under his guidance.

"After we've seen all the recent troubles of the eurozone, they may need some fiscally responsible members and Bulgaria will be one. The more votes they have for more fiscally conservative policies, the better for the eurozone. Currently it does not sound like this is a very fiscally responsible club and it could benefit from new members," he told the BBC.

The BBC points out that "Bulgaria has the smallest budget deficit among the 27 members of the EU - though the recession has hit public finances and the government expects its 2010 deficit to expand to 4.6% of GDP."

Djankov for CNN: Eurozone Needs Countries Like Bulgaria

Bulgaria's finance minister has confirmed the government's revamped euro bid plans, saying in an interview for CNN that the eurozone needs countries with tight fiscal policies like Bulgaria.

"The Bulgarian currency the lev has been tied to the euro since 1999, so in a way we are already in a situation where it is as if we have the euro. I frankly think the eurozone needs countries like Bulgaria with tight fiscal policies more than these countries need it," Djankov said in an interview for CNN at the end of November.

He agreed that the euro will undoubtedly survive the current crisis but said it is unjustifiably perceived as damaged goods.

"The euro will survive for sure. The current crisis and the resolution of the crisis shows not so much that the euro is in trouble, but rather that the European institutions were not ready to deal with this crisis. I think the focus is on the European Commission and the European Central Bank and how they can be improved, not the currency itself."

According to Djankov Estonia's entry into the eurozone from next January is going to bring one more responsible member.

"There aren't that many fiscally responsible members right now. Any additional ones may help the eurozone itself," he said.

The events in Ireland, considered and widely advertised until recently as an economic dream of the whole of Europe, put a question mark over the economic future of Europe and how it can compete not only with the United States, but with the Asian countries, according to Djankov.

"This question mark is unanswered for now."

"Everybody is watching Portugal now, that's why it was so important for Ireland to be resolved fairly quickly. The EU finance ministers succeeded in that, but the worry is now about Portugal and Spain," he said.

Bulgaria's finance minister said he was in favour of looking at places like Portugal even before things get going and working out what would have to be done.

"What the quick Irish plan showed is that it can be done in a week to ten days, but some sort of pre-planning is a very good idea so that the markets are calmer, especially having in mind that the holidays are coming in a month, a period, when some of the biggest crises have occurred," Djankov said.

Bulgaria's Finances in Figures

IMF Sees Bulgarian Economic Growth at 0%-0.4% in 2010

The International Monetary Fund expects Bulgaria's economy to grow from 0% to 0.4% in 2010 as the country is going through its first recession in twelve years.

The Washington-based lender projects 2010 inflation to be moderate, while the current account deficit is expected to fall below 3% of gross domestic product, Catriona Purfield, IMF's new mission chief, said in Sofia on October 4 after a two-week review.

According to IMF experts Bulgaria's economy will gain momentum in 2011 and may expand by 2%-2.5% on an annual basis.

Bulgaria aims to have a budget deficit of 2.5% of gross domestic product and a growth of 3.6% in 2011, according to the budget draft. The economy contracted by 5% in 2009.

'Bulgaria is benefiting from stronger exports and the economy is poised to stage a gradual recovery,' the IMF said in a statement.

'Recouping the shortfall in tax collection seen through August by the year end will be challenging and shortfalls may occur. Safeguarding the 2010 deficit target will therefore require strong spending control,' the Fund said.

The IMF said it approves the fiscal policy of the government and called on it to keep the tight control over spending this year to make up for a lower than expected flow of tax revenues. The government targets a deficit of 4.6% of GDP in 2010.

The visit of a mission of the International Monetary Fund to Sofia, which started on September 23 and featured regular bilateral discussions on economic policies with the Bulgarian authorities, ends on Monday.

The mission was headed by Ms. Catriona Purfield, who has recently assumed mission chief responsibilities for Bulgaria. This was Ms. Purfield's first visit to the country. Mr. Tonny Lybek, IMF's Regional Resident Representative in Bulgaria and Romania participated in the meetings as well.

The mission met with officials from the Ministry of Finance, the Bulgarian National Bank, other governmental agencies, as well as representatives from the private sector, including banks and industry, unions, and non-government organizations.

Bulgaria's seasonally adjusted gross domestic product marked an increase of 0.5% in the second quarter compared to the first three months of the year thanks to a rise in exports, pulling the country out of recession, the prime minister announced earlier this week.

At the beginning of March the International Monetary Fund projected Bulgaria's budget deficit to stand at 1,8% of gross domestic product this year, which totals nearly BGN 1,2 B.

The Washington-based global lender forecast this year's inflation at 2,2%, economic growth at 0,2%, and the current-account gap at 5,5%.

A month later however the center-right government dropped its plans for applying for ERM II after raising the alarm that the 2009 budget gap was 3.7% of gross domestic product rather than the 1.9 % due to unaccounted procurement deals.

The European Union's poorest country is currently going through its first recession in 12 years after a three-year lending boom stalled and foreign investments dried up.

Earlier this year, the government adopted a package of austerity measures, freezing public pays and pensions in a bid to reduce the bloating deficit.

It revised up to 1% its economic growth forecast for this year, pinning its hopes on increasing exports.

Bulgaria Likely to Register Smaller Budget Deficit in 2010 than Expected

Bulgaria registered a budget deficit of only 2,65% in the first eleven months of 2010, which is far below the forecast of the revised 2010 State Budget Act of 4,8% for the entire 2010, according to financial data, released at the end of 2010.

This becomes clear from data released Thursday by the Finance Ministry, which indicates that it is almost impossible for Bulgaria to complete 2010 with the budget deficit forecast in state budget act revised in June.

Thus, in January-November 2010, Bulgaria accrued a deficit of BGN 1.866 B, and to reach the 2010 forecast figure of BGN 3.691 B, the government will have to add close to BGN 2 B to the deficit in December alone.

Bulgaria's consolidated budget fiscal program actually saw a deficit of BGN 1.967 B in the first eleven months of 2010 but part of that is covered by the BGN 101.3 M surplus in Bulgaria's EU dealings.

In November alone, the Bulgarian state budget registered a surplus of BGN 36.5 M.

In the first 11 months of the year, Bulgaria's state revenues amounted to BGN 21.355 B, or 87% of the year forecast. The total tax revenues are BGN 16.985 B, which is 79.5% of the total state revenues in that period.

BGN 3.08 B came from direct taxes (88.5% of the 2010 forecast amount); indirect taxes brought BGN 8.8 B (89.3% of the 2010 forecast amount). The income from VAT was BGN 5.46 B (93.2% of the 2010 forecast), and from excise taxes – BGN 3.229 B (82.8% of the 2010 projection); revenues from customs duties amounted to BGN 110 M, 119% of the expected amount.

The sum raised from property and other taxes in Jan-Nov 2010 was BGN 640.5 M (88.9% of the expected amount). The income from social security and health insurance was BGN 4.466 B, or 86.4% of the projection.

In the second half of 2010, the government saw an year-on-year growth of indirect taxes – they increased by BGN 354.8 M in July-November 2010 compared with the same period of 2009.

Non-tax state revenue in the specified period amounted to BGN 3.078 B, or 90.6% of the projected amount.

The foreign aid that Bulgaria got in Jan-Nov 2010 amounted to BGN 1.292 B (66.9% of the projection), which is BGN 92.4 M (7.7%) increase compared with the same period of 2009.

Bulgaria's state spending in first eleven months of 2010, including Bulgaria's contribution to the EU budget, amounted to BGN 23.221 B, which is 83.5% of the projected amount. Non-interest spending was BGN 19.54, or 91.7% of the forecast amount. Compared with the same period of 2009, the non-interest spending grew by 5.1% (BGN 943 M). The spending for social security and health insurance increased by BGN 912 M.

BGN 494 M more went to cover the increase of retirement pensions approved in the first half of 2009.

Capital spending amounted to BGN 2.596 B, or 68.5% of the 2010 forecast, and interest payments amounted to BGN 470 M, or 92.5% of the projected amount for 2010.

In the first 11 months of 2010, Bulgaria contributed to the EU budget a total of BGN 614.7 M.

In November 2010, Bulgaria's fiscal reserve was BGN 6.4 B.

Bulgaria's Gross Foreign Debt Down by EUR 1.4 B Y/Y

At the end of October 2010, Bulgaria's gross external debt stood at EUR 36,02 B, which is a decrease of EUR 1,415 B compared with October 2009, according to latest data of the Bulgarian National Bank.

Thus, in October 2010, Bulgaria's gross external debt was 99.7% of GDP; it decreased by EUR 1.78 B compared with the end of December 2009, when it amounted to EUR 37.80 B, or 107.9% of GDP.

As of end-October 2010 long-term liabilities amounted to EUR 24.68 B (68.5% of total debt), and short-term liabilities came to EUR 11.34 B (31.5% of total debt).

The general government external debt was EUR 2.73 B (7.6% of GDP) as of end-October 2010. It decreased by EUR 70.1 M against the end of 2009. Compared to end-October 2009, (EUR 2.75 B) the sector's debt decreased by EUR 23.5 M.

Banks' external debt was EUR 6.71 M (18.6% of GDP). It decreased by EUR 1.65 B (19.8%) against the end of 2009. Compared to end-October 2009 (EUR 8 B) the sector's debt decreased by EUR 1.34 B.

Other Sectors' debt was EUR 12.06 B. It decreased by EUR 101 M relative to the end of 2009.

Compared to end-October 2009 (EUR 12.3 B), the sector's debt decreased by EUR 281.3 M.

As of end-October 2010, the stock of intercompany lending in Bulgaria was EUR 14.51 B, which was EUR 44.2 M (0.3%) more against the end of 2009. Compared to end-October 2009 (EUR 14.3 B) the sector's debt increased by EUR 239.2 B.

In January-October 2010, Bulgaria's gross external debt service was EUR 6.33 B (17.5% of GDP) against EUR 6.2 B (17.7% of GDP) for the same period of 2009.

In January-October 2010, loans and deposits received from non-residents were EUR 4,4 B (12.2% of GDP) against EUR 6.07 B (17.3% of GDP) for the same period of 2009. In the reported period General Government received EUR 156.6 M (3.6%), Banks received EUR 1.84 B (42%), Other Sectors - EUR 722.8 M (16.4%), and EUR 1.67 B (38.1%) were the newly disbursed Intercompany Lending.

As of end-October 2010, the net external debt was EUR 18.36 B. It decreased by EUR 1.13 B (5.8%) against the end of 2009 (EUR 19.5 B). As of end-October 2010 as a percent of GDP it amounted to 50.8%, decreasing by 4.8 p.p. compared to end-2009 (55.6%).

As of October 30, 2010 gross external assets were EUR 17.66 B against EUR 18.31 B million as of end-December 2009. As of end-October 2009 net external debt was EUR 19.86 M, or 56.7% of GDP.

Bulgarian Customs Boast Decent Revenues in 2010

Bulgaria's Customs Agency will raise a total of BGN 6,6 B in 2010 from VAT, excise and import duties, according to preliminary data released at the end of December.

If this forecast proves correct, the customs will meet 100% of their projected revenue for 2010, and will collect BGN 250 M more for the state budget than they did in 2009.

The total income from VAT on imports is expected to reach BGN 2.877 B, which is BGN 500 M more than in 2009.

The 2010 revenue from excise taxes is estimated to be about BGN 3.6 B, and the revenue from customs duties will reach BGN 117 M.

The total 2010 income from excise fees on fuels amounts to BGN 2.237 B, an increase of BGN 22 M year-on-year. The Customs Agency has refunded to businesses a total of BGN 443 M in 2010, up by BGN 66 M compared with BGN 377 M in 2009.

After the refunds are subtracted, the total net income from excise on fuels amounts to BGN 1.794 B, which is actually BGN 43 M less than in 2009.

According to the preliminary data of the Customs Agency, there has been a substantial increase in the revenues collected from excise duties on alcohol.

Thus, a total of BGN 150 M were collected from duties on spirits in 2010, up by 64% - or BGN 58 M – from the BGN 91 M in 2009.

At the same time, however, the revenues from excise on cigarettes and tobacco dropped by BGN 100 M in 2010.

While a total of BGN 1.788 B were raised from the cigarette excise in 2009, in 2010 the sum dropped to BGN 1.686 B, which according to the Customs Agency comes primarily from the reduced output of the two Bulgartabac plants in Sofia and Blagoevgrad, with the total amount of excise on their products dropped by 32%, or BGN 280 M.

In 2010, the Customs Agency refunded to companies a total of BGN 160 M for destroyed cigarettes with old stamps for which the tax was paid in 2008 and 2009.

The Customs Agency press service states that the institution's efforts are concentrated on fighting contraband and the evasion of excise duties.

It says that since January 1, 2010, customs officers detained a total of 242.2 million contraband cigarettes, which is many times more than the number of smuggled cigarettes caught in previous years, as a total of only 53.6 million smuggled cigarettes were detained in the entire period from 2007 to 2009.

Bulgaria Scoops BGN 17 M after Air Strikes on Luxury Mansions

About BGN 17 M have went to the state treasury as a result of the tax checks from Operation Helicopter by the Bulgarian National Revenue Agency (NRA), officials announced at the end of December.

The operation, carried out in September and October, mapped out luxury properties and mansions around the country through air surveillance in order to identify their owners and investigate their sources of wealth.

Tax violations have been registered in 400 properties around the country, data from the checks showed, and 1184 applications for registration of properties have been submitted in Sofia during the NRA campaign.

Bulgaria: No Need for IMF Bailout Talks by 2012

Bulgaria's finance minister has assured that the country will have no need to hold talks with the International Monetary Fund over a bailout loan for its ailing economy in the next two years.

"There will be no need for a loan not only this year, but the next two years as well," Minister Simeon Djankov said at the beginning of September.

Bulgaria, the European Union's poorest country, is currently going through its first recession in 12 years after a three-year lending boom stalled and foreign investments dried up.

Earlier this year, the government adopted a package of austerity measures, freezing public pays and pensions in a bid to reduce the bloating deficit.

The consolidated budget deficit exceeded BGN 1.5 B in the first six months of 2010 due to a fall in revenues and a rise in spending for social payments.

The center-right cabinet increased earlier this year its 2010 target for deficit to 4.8% of GDP on a cash basis and 3.9% of GDP under EU accounting rules, far wider than initial estimates.

The cabinet midterm fiscal policy plans envisage that Bulgaria will cut twice its fiscal shortfall to 2.5% of gross domestic product next year.

It revised up to 1% its economic growth forecast for this year, pinning its hopes on increasing exports.

The country has widely been seen as a a potential candidate for aid but has declined to take a loan from the IMF.

GERB, which swept the general elections last summer, first said they would immediately sign a stand-by agreement with the IMF to serve as a guarantee for the country's financial stability if they come to office.

Its tenure however has been marked by a series of u-turns on important issues, including IMF bailout loan.

While some of its neighbors are completely dependent on EU and IMF loans, such as Greece with its large bailout, Bulgaria's government has said the assessment of the options has shown aid is unnecessary.

According to it the country is better prepared to weather the global crisis in comparison to other European countries thanks to its prudent fiscal policy.

Bulgaria currently operates in currency board regime and the lev is pegged to the euro.

Credit Rating News

S&P Confirms Bulgaria's Credit Ratings

Bulgaria's long- and short- term foreign and local currency credit ratings affirmed in December as 'BBB/A-3' by the credit agency Standard&Poor's

The agency has deemed the long-term credit rating outlook for the country as stable. The transfer and convertibility risk assessment (T&C assessment) rating remains an unchanged 'A'.

"The ratings on the Republic of Bulgaria factor in our favorable view of its fiscal track record, its low gross debt, and its medium-term growth prospects--particularly if they are backed by improving absorption of EU funds and other benefits stemming from EU membership. We see Bulgaria's large external imbalances as the main rating constraint, although the 2009 recession engendered a sharp adjustment of the country's current account deficit," S&P states in its report.

According to the credit agency, after a 5% contraction in Bulgaria's GDP in 2009, a positive growth of 0.5% in 2010 is expected due to the recovery in exports.

"That said, Bulgaria continues to face economic risks. During 2010-2011, weak domestic demand will likely lead to a further decline in the current account deficit, which net equity inflows and EU transfers will cover," S&P clarifies.

Bulgaria's government has in our view appropriately addressed the deterioration in budget gaps and a budget deficit of below 3% of GDP is predicted in 2011, according to the report.

Japan's JCR Raises Bulgaria Outlook to Stable

Japanese credit rating agency JCR at the end of October affirmed its BBB rating on Bulgaria's foreign currency long-term senior debts and BBB+ rating on the country's local currency long-term senior debts.

The outlook was revised to stable from negative.

"The ratings are primarily based on the country's prudent fiscal policy that has led up to a substantial reduction of the government debt and accumulation of large fiscal reserves, its maintenance of the solid currency board arrangement through collaboration between the government and the Bulgarian National Bank (BNB), and its expanded production capacity rendered by massive inflows of EU subsidies and foreign direct investment (FDI)," JCR said in a statement.

The agency points out that the ratings remain constrained by the country's sizable foreign debt in the private sector and its industrial transformation still being at a primary stage.

Moody's Affirms Bulgaria's Credit Rating with Positive Perspective

Moody's Investors Service affirmed in August Bulgaria's Baa3 credit rating with a positive perspective.

In its assessment of Bulgaria's current condition, Moody's has defined the country's state finances as average for the EU.

In January 2010, the credit rating agency changed Bulgaria's perspective from stable to positive reflecting the sustainability of the country's finances with respect to the effects of the global financial crisis.

Moody's expects an economic growth of -1% for Bulgaria in 2010, and a positive growth of 2.8% in 2011. It has pointed out that expectations for a lower growth make its forecasts fro Bulgaria less optimistic.

The credit rating agency has stated that Bulgaria can hope to join the ERM II, the euro zone waiting room, in 2012 at the earliest, and might hope to adopt the euro by 2015.

The major challenges before Bulgaria appear to be its weak institutions and the high foreign debt of the private sector, which can threaten the currency board that keeps the Bulgarian lev pegged to the euro.

Bulgaria's government is advised to continue to stick to strict fiscal policies and reforms of the public sector.

Bulgaria Stock Exchange developments

Bulgaria's Only Stock Exchange Goes Public

Bulgaria's only stock exchange became a public company in the middle of December after the Financial Supervision Commission approved its prospectus and the bourse was listed on its own platform.

The capital of the bourse is a total of BGN 6 582 860 at BGN 1 apiece. The actual trade with shares will start after the upcoming registration of the stock exchange's public state and new status in the Trade Registry.

Bulgaria's Finance Ministry raised at the beginning of October its share to 50% plus one share from 44% in the country's stock exchange. The government bought 715,000 shares at BN 1 apiece as it prepared to sell its majority to an industry investor and offer the rest to the public.

Since 2008, the stock exchange has traded on the Deutsche Boerse's Xetra platform under a contract that expires in 2012. Bulgaria has discussed ways to sell its bourse stake over the past decade with Sweden's OMX AG and exchanges in Austria, Greece and Poland to boost interest in local stocks and make trading more transparent.

Representatives of the Finance Ministry and the Stock Exchange have commented that the move will give the ministry the opportunity to seek a strategic investor, make the Exchange transparent, increase interest towards the capital market and reinstate the trust in the latter.

Meanwhile Victor Papazov, founder, former CEO and chairman of the Bulgarian Stock Exchange has harshly criticized the decision, saying the Bulgarian government is threatening the country's economic future by effectively nationalizing its stock exchange at a knock-down price.

Bulgaria Govt First Privatization Effort Fails

The privatization tender, through which Bulgaria sought to boost public revenues by some BGN 80 M, has managed to sell state stakes in only eight companies on Sofia stock exchange.

The government offered for privatization through the Sofia stock exchange a package of small state companies or stakes in such firms as part of its efforts to rake in revenues.

This was the first attempt at privatization for the center-right government of Boyko Borisov since the beginning of its term last summer.

The package included twenty nine state companies, the most attractive of them being Montazhi Sofia, which deals with technological equipment, steel constructions, electric installations, industrial pipelines, reservoirs.

The offered price for 100% stake in the company was set at BGN 70 M, but analysts say it is too high and expectedly no bidders turned up.

The state also failed to attract buyers for some of the other companies considered to be among the most attractive, including Trade Tranzit Zone -Varna and a 49% stake in Duty Free Zone-Plovdiv.

Bulgaria's privatization agency managed to earn a mere BGN 2,885 from the transactions, since seven of the stakes were settled with compensatory notes and only one of the asset, a 0.114% stake in Plovdiv-based Podemstroymash, was paid in cash.

The privatization through the Sofia stock exchange does not entail the listing of the offered companies.

Bulgaria Moststroy's File for Bankruptcy Turned Down

A Bulgarian court rejected at the end of December the application for insolvency by Moststroy AD, a construction company believed to be controlled by billionaire Vassil Bozhkov, which was filed in October.

Sofia City Court has decided not to presume insolvency as the company has sufficient assets, experts commented.

Moststroy AD has already appealed the ruling.

Moststroy AD and three of its subsidiaries announced on October 6 that they have filed for bankruptcy after all their bank accounts were frozen because of unpaid debts.

A loan borrowed from the United Bulgarian Bank, a unit of the National Bank of Greece SA, was due on May 31, but the company said it has no money. Its construction machines and other equipment have been seized by Interlease, the company that leased them.

Analysts say the file for insolvency of Moststroy AD is very bad news for the Bulgarian capital market, but comes as no surprise. The precedent is feared to further dent the trust of the investors, particularly those from abroad, and make it more difficult to get credits from banks.

Under local legislation a company, which has declared insolvency, can restructure and draw up a rehabilitation plan.

Moststroy AD is one of the winning bidders to build Lot 4 of the Trakiya Highway and some have commented that the insolvency file is the result of a deliberate plot, hatched by unscrupulous businessmen.

According to the skeptics the move aims to restructure the profitable units of an enterprise and put them into companies, in which the owner is a shareholder, leaving the liabilities in the old company and to the harm of creditors.

Bulgaria Budget 2011

Bulgaria's Rulers Adopt 2011 Budget Deficit of Almost 3% of GDP

Bulgaria's Parliament adopted at the beginning of December the 2011 State Budget Act after 15 hours of debates that went late into the night.

The budget bill was adopted only with the votes of the ruling center-right party GERB and their allies from the nationalist party Ataka.

The major difference between the bill adopted at first reading is the increase of the projected 2011 budget deficit from BGN 1.96 B to BGN 2.16 B – or from 2.5% to about 2.75% of the GDP – which, if it materializes, would still be below the 3% threshold set by EU Stability and Growth Pact.

The higher deficit came from decisions to increase the funding for certain sectors – BGN 40 M more for education, BGN 10 M more for culture, BGN 10 M more the judiciary, among others.

In June, the center-right Bulgarian cabinet revised the state budget increasing its 2010 target for deficit to 4.8% of GDP on a cash basis and 3.9% of GDP under EU accounting rules, far wider than initial estimates. Final Eurostat data released recently showed that in 2009, Bulgaria's budget deficit actually was 4.7%.

The budget law projects state revenue of BGN 16.076 B in 2011 vs. state spending of BGN 18.23 B. Tax income will be BGN 14.353 B plus BGN 1.674 B from non-tax revenues. Both the opposition Socialist Party (BSP) and the rightist Blue Coalition demanded that the budget law should provide for higher projections of state income in 2011 but these motions were rejected.

Bulgaria's contribution to the EU budget will be BGN 811.479 M.

The projected GDP in 2011 is over BGN 77 B (EUR 39.3 B), which means a GDP growth of 3.6%, a figure the opposition and other critics slammed as unrealistic.

After growing by more than 6% in 2004-2008, the Bulgarian economy shrank by 4.9% in 2009, and is expected register a growth around 0% in 2010 (-0.1%, according to a recent forecast of the EC).

The main factor for the GDP growth in 2011 is expected to be an increase in exports, followed by an increase of domestic demand. Earlier this week, the European Commission estimated the expected increase in Bulgarian GDP at 2.6%, thus being less optimistic than the country's government.

The 2011 state budget also provides for raise BGN 2.35 B in foreign debt in order to finance the deficit. At present Bulgaria has one of the lowest levels of state debt in the EU – 14.9%, after in the period 1990-1997 it amounted to about 168% of the GDP; it shrank dramatically only after 2001.

An especially controversial provision adopted as part of the 2011 budget allows the government to "nationalize" the reserve of the National Health Insurance Fund – which amounts to BGN 1.5 B. Thus, the government will be permitted to use this money for both healthcare spending and expenditures in other sectors.

Deputy Finance Minister Vlavislav Goranov explained that the funds in question will be used to finance state expenditures because this is better option than a foreign loan, whose interest would cost the state budget up to BGN 100 M.

He declared that the decision cannot be seen as "nationalization" of the reserve of the National Health Insurance Fund because the Fund is a "publicly owned resource."

"It makes more sense – to use this money that otherwise won't be in use and will be kept at a low interest rate, rather than taken international loans on which we will spend BGN 100 M for interest," Goranov said.

Taxes and Social Securities

Bulgaria Govt Scraps VAT Hike, Plans VAT Cut

Half a year after deciding not to raise the 20% value added tax, Bulgaria's finance minister has made it clear he is set to even cut the rate as of 2012 at the earliest.

"This year there will be no Christmas bonuses for the people from the state administration, but we plan to decrease VAT as of 2012 at the earliest," Finance Minister Simeon Djankov said at a seminar at the European Parliament at the beginning of December.

He declined to specify the amount of the cut.

After a series of U-turns Bulgaria's government decided at the end of May to scrap plans for a VAT increase in a bid to plug a budget gap that has thwarted the new EU member's efforts to join the euro in the near future.

The VAT increase has been a thorny issue in Bulgaria in the last few months with the cabinet changing their mind numerous times and several versions tossed around, ranging from 22% to 24%.

The VAT hike was proposed as part of a package of new austerity measures, which also include the introduction of a luxury tax, floating minority stakes in state-owned companies and a possible bond issue.

Politicians, analysts and trade unions took a firm stand against the hike, citing a long line of negative repercussions – an increase in the inflation rate, an expansion of the grey sector, a slow-down in the economic growth, in short a boost for the impact of the crisis.

Representatives from all business sectors cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in government expenditure and structural reforms.

Bulgaria Touted as Tax Heaven - KPMG

Bulgaria is among the top ten countries in the world with the lowest effective rates and is preceded only by Hong Kong, tax havens like the Bahamas Islands and petro-states like Saudi Arabia, shows an analysis by KPMG consultancy, released in the middle of October.

Effective rates are derived by taking total income tax and/or social security over gross income prior to deductions. The data takes both the personal income tax rate and social security rates into account for employees earning USD 100,000 across 81 countries.

The survey shows that the majority of rate movement in 2010 comes from Europe. The highest personal income taxes in the world are still paid by citizens of the European Union (EU) where average rates went up by 0.3% over the past year.

The low flat tax initiatives of Eastern European governments fuelling the historic downward trend have stagnated. Estonia, which first created a flat tax in 1994 and intended to reduce the rate down to 18% by 2012, has since abolished its plan. In another example, Latvia increased rates, raising its flat tax from 23% in 2009 to 26% in 2010.

In Western Europe, the upward trend initiated by Ireland last year has spread as anticipated. While the top Irish rate went up by 1% in 2010, the UK dominated headlines with a 10% increase raising its top rate from 40% in 2009/10 to 50% in 2010/11 – the highest rate increase seen globally this year.

After the Europeans, the next highest taxes are paid by the people of the Asia-Pacific region, but the margin continues to spread.

As of 1 January 2008, Bulgaria introduced a 10%  flat tax applicable for all income levels,i.e., there is no non-taxable income threshold. It replaced the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

The Bulgarian mandatory social security rate is 13% for an employee, while the rate is approximately 20.5% for an employer (depending on the industry in which the employer is involved as the employment accident fund varies accordingly between 0.4 and 1.1%).

The maximum insurable income is capped at approximately BGN 2,000 per month.

Depending on the circumstances, certain local taxes may apply: immovable property tax, inheritance tax, donation tax and vehicle tax.

Bulgaria Oks 1.8 Percentage Points Hike in Social Security Burden

Bulgaria's government and employers agreed in October to increase by 1.8 percentage points social contributions payments as of next year during talks, boycotted by the trade unions.

Bulgaria's government backtracked earlier in the year on plans to increase social contributions payments by 3 percentage points as of next year to 31.5% in the face of strong resistance.

An overwhelming majority of Bulgarian employers - a whopping 95% - have taken a firm stand against the government's plans for an increase in social contributions payments, a survey shows.

Business and employer associations slammed the increase and warned the move will hinder the country's fragile economic recovery.?

Bulgaria's seasonally adjusted gross domestic product marked an increase of 0.5% in the second quarter compared to the first three months of the year thanks to a rise in exports, pulling the country out of recession.

This was the first time that Bulgaria's GDP expanded since the recession set in at the end of 2008 and the beginning of 2009.

Bulgaria, the European Union's poorest country, faced its first recession in 12 years after a three-year lending boom stalled and foreign investment dried up.

The government has pledged to stick to a tight fiscal policy and keep the deficit below 3 % by the end of this year.

The recovery of the Bulgarian economy, which operates in a currency board regime, is lagging behind that of other Eastern European countries.

Analysts from local think-tanks have forecast that Bulgaria's economy is likely to continue to contract in the second half of this year and may fail to return to growth earlier than next year.

The European Commission said last month that Bulgaria's economy is likely to start to recover towards the end of 2010 under the impact of the international cycle.

Banks

Bulgaria Says No to Keeping Clients in the Dark over Bank Rates

Banks in Bulgaria will be obliged to inform customers of any significant movements in interest rates on their accounts or expenses if they are in credit under legal amendments that parliament adopted in October.

The amendments to the Law on Credit Institutions aim to improve the protection of customers' rights and tighten the control over banking groups and financial holdings, which operate in several EU member states.

The changes come into force as of the beginning of 2011.

So far the majority of banks in Bulgaria have been failing to inform customers about changes to the interest they are earning on their cash or the refund they have to pay for a loan.

They rely largely on people seeing adverts in newspapers or visiting their branches to find about about interest rate cuts or rises.

Earlier in October Bulgaria's central bank tightened the rules for banks capital and liquidity to bring them in line with European capital adequacy legislation.

The Bulgarian National Bank has repeatedly stated that the banking system in the country is stable even thought Greek banks hold nearly a 30% of the Bulgarian banking market, a 20% share of the bank loans and one-third of all deposits.

Some of the biggest lenders in Bulgaria are managed by Italy's UniCredit, Greece's National Bank of Greece, Hungary's OTP and Austria's Raiffeisen.

Other Greek banks present in Bulgaria include EFG Eurobank, Piraeus, Emporiki and Alpha Bank.

Experts have warned that Bulgaria risks seeing its banks sucked under by the fiscal sins of neighboring Greece,

Earlier in 2011 Bulgaria's central bank assuaged fears over funds outflow from Greek bank subsidiaries in the country to headquarters in Greece, saying this is part of the free movement of capital.

KBC Delists Bulgaria's CIBank after Upping Stake to 100%

Belgian bank KBC Group NV announced at the beginning of December that it will delist Bulgaria's CIBank from Sofia stock exchange after raining its stake in it to 100%.

Belgian banking group KBC acquired full control over its subsidiary in Bulgaria CIBank after the prime minister's long-time live-in girlfriend Tsvetelina Borislavova sold her last 16% stake.

The price of the deal exceeds BGN 141 M or BGN 110.49 per share.

The deal makes KBC the sole shareholder of the company and it does not affect KBC's capital position.

"Through CIBank and DZI Insurance, KBC is the main bancassurance player in Bulgaria, with a dense network for distributing banking and insurance products," Jan Vanhevel, KBC Group CEO commented.

He assured that KBC has identified Bulgaria as one of the group's strategically important home markets.

KBC agreed to buy 75% in the bank, initially called EIBank, for EUR 295 M in September 2007 and secured the approval of both the central bank and competition authorities at the end of the year.

The group bought half the stake of board chairwoman Tsvetelina Borislavova and the full stake held by Novator investment fund, which manages the Bulgarian assets of Icelandic mogul Thor Bjorgolfsson.

That was the second major acquisition by the Belgian group in Bulgaria, having agreed earlier that year to buy 70% in insurer DZI, later boosting its stake to 85%.

Initially Borislavova kept 22,3% of her shares and became "KBC's partner", keeping her position as chair of the supervisory board.

Subsequently KBC launched a buyout offer to the minority shareholders in the bank and gradually increased its capital.

Bulgaria's Economic and Investment Bank (EIBank) changed its name to CIBank in October 2008 without giving reasons for its decision.

Forecasts

EC: Bulgaria Boosts Exports, GDP to Grow 2.6% in 2011

The main driving forces behind Bulgaria's economic turnaround in 2011 will include a continued strong export pick-up and replenishing of inventories, while domestic demand is expected to contract, according to the European Commission's spring economic forecast.

The year on year GDP growth in Bulgaria 2010 is expected by the EC to be -0.1%, while the expected figure for 2011 is 2.6%. This is less optimistic than the 3.6% expected by the Bulgarian government.

Despite the healthy export demand, Bulgaria's industrial output has remained at low levels. In addition, retail trade and construction are still depressed, while credit growth is only minimal, the forecast shows.

Net exports are expected to have been the main growth driver in 2010. Together with a build up inventories, these should almost compensate for the negative contribution of domestic demand in Bulgaria.

Ernst & Young: Bulgarian GDP to Grow 3.6% in 2011, 6% in 2012

Ernst & Young, one of the world's leading professional services companies, expects that the Bulgarian economy will grow by 3.6% in 2011, the same growth rate forecast by the Bulgarian government.

In its Eurozone Economic Forecast Winter 2010, Ernst & Young says it expects the Bulgarian economy to shrink by 1% in 2010 overall, and to return to a growth of more than 6% after 2012 (6% in 2012, 6.9% in 2013) – even though the analysis also outlines certain major risks for this scenario.

The forecast points out that despite its currency board system and sound financial policies, Bulgaria experienced a 5% fall in GDP in 2009. However, after a 0.5% quarterly decline in Q1 this year, GDP returned to growth with a rise of 0.5% in Q2, although H1 GDP was still 2.5% below a year earlier.

Ernst & Young says that the unexpected strength in the Eurozone, in particular Germany has helped to lift activity and exports, and thus Bulgaria's GDP posted a second successive rise in Q3, of 0.3%, while in year-on-year terms the economy grew by 0.2%, the first annual rise in almost two years.

The analysis emphasizes the fact that the Bulgarian recovery is driven "almost entirely" by the growth in exports with little sign of investment starting to recover in response to more robust external demand, and a continuing decline in domestic demand.

The forecast further warns that because of the ongoing problems in the Eurozone, the impetus to growth from exports is also likely to fade somewhat, perhaps dampening GDP growth in Q4.

Ernst & Young stresses that a relatively low debt/GDP ratio and the currency board system have helped to shelter the Bulgarian economy against contagion from the southern European crisis so far.

RBS: Bulgaria Govt Growth Estimates for 2011 Too Ambitious

The Royal Bank of Scotland Group has criticized the Bulgarian government's budget plans for 2011, saying they are over-optimistic, particularly on the revenue side.

The government's economic-growth estimate for 2011 will be difficult to achieve as "credit growth remains moribund" and consumer demand weak, Timothy Ash, global head of emerging-market research and strategy at Royal Bank of Scotland Group, told Bloomberg agency in an e-mailed note.

Bulgaria aims to have a budget deficit of 2.5% of gross domestic product and a growth of 3.6% in 2011.

The country's gross domestic product marked a slight increase of 0.2% in the third quarter on an annual basis after adjusting to seasonal variations, well below analysts' forecasts.

The European Union's poorest country, faced its first recession in 12 years after a three-year lending boom stalled and foreign investment dried up.

Bulgaria's gross domestic product (GDP) shrank 1.4% year-on-year in the second quarter, slightly milder that the 1.5% drop forecast by a flash estimate, the statistics office said at the beginning of September.

The fall of Bulgaria's gross domestic product (GDP) slowed to 3.6% on an annual basis in the first quarter of 2010 from 5,9% in the previous quarter. The country's gross domestic product shrank 5% last year.

Bulgaria's government has revised up to 1% its economic growth forecast for this year as recovering exports bolster the expansion.

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