The Bulgaria 2009 Review: Finance
Bulgaria to Apply for ERM 2 in March 2010, Firm on Euro Adoption in 2013
Bulgaria's Finance Minister Simeon Djankov announced at the end of the year that the country will apply in March 2010 to join the exchange-rate mechanism, the two-year currency stability test prior to euro adoption, and seek to switch to the common currency by 2013.
Bulgaria initially planned to apply to join the exchange-rate mechanism in November, but delayed it till 2010 after all member states submit their convergence programs, which contains the mid-term goals of the fiscal policy.
After coming into office in the summer of 2009 Simeon Djankov repeatedly stated that the country will seek to switch to the common currency in 2013.
Djankov, a World Bank economist, hopes 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, the smallest 2009 deficit in the EU and laws overhauling the inefficient health-care and social-security systems.
Bulgaria's entry in the eurozone, initially scheduled for 2010, has been set back as it is conditional on continued fiscal prudence and lower inflation.
In a confidential IMF report, which leaked in May, the International Monetary Fund called on central and eastern European countries to consider scrapping their currencies in favour of the euro even without formally joining the eurozone. The fund said the eurozone could relax its entry rules so countries could join as quasi-members, without European Central Bank board seats.
The European Central Bank (ECB) governor Jean-Claude Trichet, who was on a visit in Sofia in the middle of June, however warned against the immediate introduction of the euro, saying it is crucial that requirements are met first.
Joining the exchange-rate mechanism would bring Bulgaria closer to the umbrella of the euro region and the protection of the European Central Bank and is conditional on whether the new government will succeed to restore Brussels trust.
The lev is already linked to the euro in a currency board that keeps the Bulgarian currency at 1.9558 to the euro.
Joining the exchange-rate mechanism may allow the lev to fluctuate by as much as 15 % around a central band, though the central bank has said it will leave the lev tightly pegged to the euro through the duration of the two years.
Bulgaria Unlikely to Seek IMF Loan
Bulgaria is unlikely to seek an emergency loan from the International Monetary Fund and may launch a Eurobond early next year to meet its external financing needs, leading economists and financial experts were unanimous in 2009.
The possibility of seeking aid from other international financial institutions, such as the World Bank (WB), the International Bank for Reconstruction and Development (IBRD) and the European Investment Bank (EIB) however has not been ruled out.
Finance Minister Simeon Djankov has been adamant that the decision not to tap the IMF is more straightforward because Bulgaria would not qualify for the multilateral lender's new flexible credit lines, which offers loans without intrusive policy prescriptions.
Bulgaria, the EU poorest member, relied on foreign funding for a quarter of its gross domestic product in 2008, but has so far avoided the route taken by richer neighbors such as Romania and Hungary, which received IMF-led rescue packages.
Bulgaria Set to Register Record-Low Inflation End-2009
Bulgaria is on its way to mark the lowest inflation rate since the index was recorded for the first time in 1991, according to experts.
They even expect that Bulgaria may target at the end of the year a zero inflation rate or even deflation in the consumer prices.
The comments were prompted by statistics office data, which showed the consumer price index (CPI) in Bulgaria registering another month of deflation in November, falling 0,1% year-on-year after marking a 0,3% drop the previous month.
On a monthly basis, the CPI edged up by 0,1% due to an increase in food and soft drinks prices, transport, clothes and shoes, after marking the same rise in October, data showed.
Bulgaria's inflation rate has registered a drop on a monthly basis over the last five months of 2009 and has gone down from two-digit levels to nearly a zero on an annual basis.
The drop in inflation is good news for Bulgaria as its high levels have been one of the key obstacles for the adoption of the European single currency. The country currently operates in currency board regime and the lev is pegged to the euro.
Bulgaria Plans to Cut VAT to 17% in 2011
Bulgaria's prime minister Boyko Borisov announced on December 22 that Value-Added Tax (VAT), which currently stands at 20%, could be cut to 17% in 2011.
Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.
After coming into office, the new Bulgarian government announced it plans to keep unchanged the flat income tax rate and cut the Value-Added Tax (VAT) from the current 20% to 18% in 2010 and by a further 2% by the end of the term of office of Prime Minister Boyko Borissov’s administration
Standard & Poor's Upgrades Bulgaria's Outlook to Stable
Standard & Poor's Ratings Services revised at the beginning of December its outlook on the Republic of Bulgaria to stable from negative due to the government's commitment to fiscal discipline.
The 'BBB' long-term and 'A-3' short-term sovereign credit ratings were affirmed.
According to the agency Bulgaria continues to face economic risks due to the uncertain outlook for external demand and the sharp tightening of the external commercial credit channel, which negatively affects domestic demand.
Standard & Poor's expects Bulgaria's GDP to contract by around 6% in 2009 and a further 2% in 2010, followed by a positive growth rate in 2011.
The deficit for this year is set at up to 1% of GDP, the lowest in the EU. A similarly low deficit is expected in 2010, on the back the government's plan to implement significant budgetary adjustment.
Bulgaria Revenue Agents to Probe Chalga, Soccer Cash
Bulgaria’s National Revenues Agency (NRA) announced in December it will begin to investigate the earnings of musicians in the country.
The NRA declared this latest move to fight possible fraud and tax evasion, as part of its drive to raise budget revenues and clamp down on widespread fraud.
The musicians would be required to pay any back taxes they owed, if audits showed there were discrepancies between their real, and their declared, incomes.
Musicians, especially the most popular chalga singers, are reputed to command fees of thousands of leva for a single performance, and this at a time when the average Bulgarian wage is about BGN 600 per month. Azis, Gloria and Anelia are allegedly among the names who will be investigated.
Since the end of June 2009, the NRA has checked out all 105 Bentley car owners in Bulgaria, in a similar move to investigate possible fraud and hidden earnings.
They are also engaged in checking the finances of some 800 Bulgarian football players. The NRA had estimated that some of the bigger clubs owed almost BGN 8 M in unpaid tax and interest.
The NRA campaigns have a double purpose – the immediate benefit of increasing revenues for the state budget, and the longer-term elimination of tax evasion and fraud, as demanded by the European Union.
Bulgaria Govt, Passes 2010 Austerity Budget without Debate
Bulgaria's Parliament passed on November 17 a balanced but austerity state budget for 2010 with minimum debate and after it was unanimously approved by the new center-right government.
The 2010 State Budget Act was adopted with 135 votes in favor and 44 votes against. It was passed with the votes of the ruling majority from the governing GERB party and its allies from the Blue Coalition, the Ataka party, and the conservative RZS party, and was opposed by the Bulgarian Socialist Party and the ethnic Turkish Movement for Rights and Freedoms (DPS).
The only MP who took advantage of Parliamentary Chair Tsetska Tsacheva’s invitation to present their position on the budget was the Co-Chair.
The new State Budget Act envisages a 2% decline of Bulgaria’s GDP in 2010. The projected 2010 state revenues amount to BGN 26,4 B, which is a 19% decline compared to the one in the 2009 State Budget, and about BGN 435 M more than what the government expects to have actually raised for all of 2009. The social security payments will be reduced by 2% starting January 2010.
All direct taxes are going to stay the same in 2010, and only some excise taxes are going to be increased, most notably the one on cigarettes – by 43% .
BGN 20,9 B are to come from taxes, and BGN 3,4 B from non-tax revenue. Aid, the main share of which will come from the EU budget, is planned at BGN 2 B.
Foreign investments, which collapsed from BGN 6,5 B to BGN 3 B in 2009, are projected at BGN 3,3 B.
The 2010 state spending is estimated at BGN 26,86 B. Some BGN 2,6 B, or 4,2% of the GDP, will be spent on health care. 15,1% of the GDP are planned for social security. The education sector will get 4,2% of the GDP. 1,6% of the GDP will be allocated for environment, and 3,1% for transport and communications. Bulgaria’s contribution to the EU budget is estimated at BGN 779,7 M.
Bulgaria’s employment ratio is expected to drop by 2,5%, and the unemployment is expected to stand at 11,4% at the end of 2010. The minimum monthly wage will remain at BGN 240.
Later in the year the parliament decided to increase by BGN 70 M the revenues from corporate taxes as they debated at second reading the budget bill for next year.
The additional revenues are expected to come from the increased tax on gambling and will be alloted to the Health Ministry. They take the total amount of revenues from corporate taxes from BGN 1 503 267 300 to BGN 1 573 267 300.
Described by the Finance Minister Simeon Djankov as a small and meatless pizza, the new budget inspired two pizza houses in the Bulgarian capital Sofia have new specialties – meatless, or “austerity” pizza’s named after Finance Minister Simeon Djankov.
The new pizza specialty plays on the metaphor used by the Finance Minister on October 28, 2009, when, upon presenting the 2010 draft state budget, he compared it to a small meatless pizza, which, however, was much better than the 2009 budget which was just an empty pizza box.
The new specialty “Djankov” is exactly like the pizza the Minister used for his metaphor – meatless, with just one olive.
Bulgaria Oks Staggering Cigarette Tax Hike, Keeps Hard Liquor, Beer Tax Unchanged
Bulgaria’s Members of the Parliament voted on November 26 to increase the cigarettes tax, but agreed to keep the current levels of hard liquor and beer tax all through 2010.
The MPs decided on second reading to establish a BGN 101 excise for 1 000 cigarettes instead of the current BGN 41, while the proportional tax will be 23% of the sales price instead of the current 40,5%. The later will affect mostly expensive cigarette brands.
The first proposal was for a tax of BGN 74 for 1 000 cigarettes and 36% of the sales price.
The tax for tobacco for pipes and cigarettes is set at BGN 100 per kg.
The opposition left-wing declared they oppose the tax hike. Kornelia Ninova, MP and spokesperson of the Bulgarian Socialist Party (BSP), defined the move as a mistake, pointing out the negotiated agreement with the EU is for lower tax and the increase would contribute to wide-spread contraband instead of curbing smoking. According to Ninova, the tax increase will hit hard the Bulgarian cigarette maker “Bulgartabac” which employees 2 000 workers.
She was backed by Aliosman Imamov, from the ethnic Turksih Movement for Rights and Freedoms (DPS) party, who also said the changes will hurt “Bulgartabac.”
The new duties will increase the price of a pack of cigarettes anywhere between BGN 1,10 and 1,40 making the price of the best-selling “Victory” brand BGN 5 instead of the current BGN 3,40.
Bulgaria Ups Gambling Tax, Expects BGN 30 M More Revenue
Bulgarian Parliament voted November 26 to increase the tax on gambling activity from 10% to 15% at the second reading of the Corporate Income Tax.
Thus, Bulgaria is expected to raise about BGN 150 M from the gambling tax in 2010; in 2009, it is estimated to raise about BGN 117 M.
The amendment to the Corporate Income Tax was approved unanimously by all 149 MPs present during the Parliament session.
The Budget Committee of the Parliament had earlier envisaged an increase up to 12% of the gambling tax; on Wednesday, however, Bulgaria’s Prime Minister Boyko Borisov declared himself against the increase of the excise on hard liquor, and for a gambling tax of 15%.
MP Aliosman Imamov from the ethnic Turkish Movement for Rights and Freedoms criticized the ruling majority saying the major problem in the gambling sector was not the size of the tax but the weak regulation and lacking control, which would prevent the generating of the expect revenue.
MP Iskra Fidosova from the ruling party GERB announced the results of a survey commissioned by Finance Minister Simeon Djankov showing that Bulgarians are generally negative towards gambling. Only 10% think that gambling operators must be favored, whereas 60% are in favor of higher gambling tax – of about 14-20%.
Bulgaria Economy Officially Enters Recession
Bulgaria's gross domestic product (GDP) has contracted by 3,5% in the first quarter of 2009 on an annual basis, the statistics office announced on June 10.
The new data showed that the European Union newcomer has entered recession with its economy shrinking 5% from January to March and contracting 1.6% in the fourth quarter on a quarterly basis.
This is the first time that the country's GDP marked a drop on an annual basis since the financial and economic crisis in 1997 and the slump was much sharper than macroeconomists' forecasts.
The drop in GDP was the first tangible proof that Bulgaria has been hit by the crisis, whose impact has been measured so far in terms of the amount of foreign investments, industrial output, trade and incomes.
Bulgaria's exports and imports shrank by almost one third in the first quarter of 2009 on an annual basis in the wake of the global financial and economic crisis. Exports shrank 17.4% year-on-year in the first quarter, while imports contracted by 21.1%.
The data showed consumption came down on an annual basis by 5.4% in the first quarter, industry shrank 12.4% for the same period, while services' growth slowed to 2.5% from a 3.8 % increase in the fourth quarter of 2008.
Investments decreased by 14.1 % in January-March, compared with a 15.8 % growth in the fourth quarter of last year.
"Bulgaria's economy has entered recession and it will not rebound for at least one more quarter," Petar Ganev from the Institute for Market Economy, a Sofia-based think-tank, commented for Darik Radio.
"The succession of two quarters with a drop in GDP is a irrefutable proof of a period of recession. The situation is exacerbated by the slight rise in the unemployment rate and the languid demand on the real estate market. All these make us definitely say that Bulgaria's economy has entered recession," Ganev explained.
According to him the recovery will depend hugely not only on external factors, but also on the policy of Bulgaria's next government.
Last month the European Bank for Reconstruction and Development (EBRD) became the latest addition to the club of institutions forecasting a contraction of Bulgaria's economy in 2009.
The bank estimated that Bulgaria's GDP growth will shrink by 3% this year and a further 1% in 2010, echoing predictions made by the European Commission.
Bulgaria Falls Deeper into Recession, Economy Shrinks 5,8% y/y
Bulgaria’s National Statistical Institute (NSI) reported on November 13 that the Bulgarian economy has shrunk 5,8% y/y in the third quarter of 2009, as the recession in the country worsens.
The NSI figures confirmed the deepening recession following 4,9 % y/y drop in the second quarter of 2009.
Consumption plunged by 10,6% y/y in the third quarter from a 3,7 % y/y drop in the second quarter, as banks curbed lending.
Industrial output shrank 10 % from July to September, after a 7,2 % contraction in the previous quarter, while services dropped 5,7% from a 1,4 % rise in the second quarter. Agriculture however edged up 3%.
The NSI figures showed exports shrank 13,2 % y/y in the third quarter from a 15,8 % drop in the previous three months. Imports contracted by 28,7%.
Investment shrank by 22,9 % in July-September after dropping 16,3 % in the second quarter of 2009.
Bulgaria to Stay in Recession in 2010 - Think-Tank
Bulgaria’s economy will continue to contract in the second half of 2009 and will fail to return to growth next year, a report by a local think-tank shows.
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 investment dried up.
Gross domestic product may drop 6% in the third quarter of 2009, 5% in the fourth quarter and slightly grow in the second or third quarter of 2010, the Center for Economic Development (CED) said in an analysis, entitled “Bulgaria's economy – October 2009”.
FDI inflows in the country in 2010 are expected to fall sharply to their lowest levels over the last few years, totaling no more than EUR 2,5-3 B, down from EUR 3.5-4 B in 2009.
Inflation for 2009 is expected to stay below 1%, while the jobless rate is said to reach its peak in the winter of 2009-2010, surging as high as 9-9,5%.
The Bulgarian government’s most recent estimate was for a 6.3% decline in 2009 and 2% next year. The International Monetary Fund expects GDP to fall 6.5% this year and 2.5% next year. EBRD forecasts GDP to fall by 1.5%, following a 6% drop this year.
Bulgaria Central Bank Governor Swears in for Second Term
Bulgaria's central bank governor Ivan Iskrov, known for his conservative policy which has helped Sofia keep its currency board regime, swore in on October 9 to serve a second six-year term.
Kalin Hristov came into office as Deputy Governor of the central bank, taking over the Emission Department from outgoing deputy governor Tsvetan Manchev.
Ivan Iskrov was nominated by GERB party, which won a July election, and re-elected at the end of August, a week after he resigned to seek the backing of the the new centre-right government.
It was not immediately clear what brought about the U-turn in GERB initial decision to replace Iskrov, who was reelected previously in a highly controversial parliamentary vote just before the general elections.
The previous Socialist-led parliament appointed Iskrov in May ahead of the July general elections but the central bank law states it should have waited until he had three months left in office.
The first reelection of Ivan Iskrov, member of the centrist party of Simeon Saxe-Coburg was believed to be a trump card for pressing the formation into making concessions in the sharing out of key posts in the state among members of the ruling coalition.
This scenario failed after the former ruling Socialist-led coalition suffered a crushing defeat in the general elections on July 5, while the centrist party of Saxe-Coburg even did not manage to make it to the next parliament.
BNB Deputy Governor Kalin Hristov was elected Deputy Governor of BNB by the Parliament in late August 2009 with 174 votes in favor, 2 votes against, and 28 abstaining.
Unconfirmed reports in the spring of 2009 claimed that Kalin Hristov was going to become a MP from the GERB party, and that he had been helping PM Borisov's party with its economic program.
Hristov has rejected both of these claims. His name was also mentioned as a potential Deputy Minister of Finance but he was not appointed to the new government.
The other two Deputy Governors of the BNB are Dimitar Kostov – in charging of the Banking Department since 2005, and Rumen Simeonov – in charge of the Banking Supervision Department since 2007.
Bulgaria Parliament Passes New Bank Deposit Law
Bulgaria's Parliament approved in the middle of May changes to the law on guaranteeing bank deposits.
Currently the national deposit fund has to pay all deposits of up to BGN 100 000 back to the client within a period of 45 days after a bank or its creditors inform the fund of bankruptcy. The new law that was passed by the National Assembly on Thursday envisages this period being reduced to 20 days.
In November 2008 the Bulgarian government officially guaranteed bank deposits of up to BGN 100 000.
European finance ministers agreed in early October 2008 to raise the minimum guarantee of bank deposits to EUR 50 000 across all EU member states as a measure to protect against the global financial crisis.
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