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Bulgarian Economy Floats Above Water Without Direction

Published on , , Zagreb, Twitter: @AdelinaMarini
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There could have hardly been a more unfavourable moment to release the in-depth analysis about the situation in Bulgaria by the European Commission under the macro economic imbalances procedure. Only a couple of months ago, the government of "fiscal stability" of Boyko Borissov resigned under the pressure of street protests that were inspired first by high electricity bills, but then evolved into multidirectional - from the 23-year old poverty the end of which cannot be seen, to the desperate corruption among the political elites the end of which also cannot be seen on the horizon, through allowing abuse with monopolistic position on the market. Currently, the country is being governed by a caretaker government the main task of which is to prepare the early elections scheduled for May 12th. Indeed, a very unpleasant moment, especially against the backdrop of the Commission conclusions in the analysis.

Bad mid-term perspectives for growth and a serious problem on the labour market

Although ostensibly the financial sector is stable, profitability remains low and the very weak credit growth can seriously hamper growth perspectives in the future. The banking sector has remained practically untouched by the deterioration of the economic situation as a result of the global economic crisis. Banking stability is mainly due to strict supervisory standards and sufficient capital buffers. High provisions, however, depress profitability in the banking sector and the low credit demand has left the banks with excessively high liquidity. It is precisely the low credit activity that makes mid-term growth perspectives look not very good.

Another serious imbalance that causes the European Commission's concern, is the situation on the labour market. It has been hit disproportionately hard by the crisis. Instead of reducing wages, the response to the crisis of many companies was to mainly sack workers. This caused in Bulgaria one of the highest declines of employment in the EU. In 2012, unemployment reached 12% and the share of those without occupation rose. Unemployment is concentrated mainly in the most vulnerable groups like low-skilled workers and the young, as the share of long-term unemployed has also risen. Skills mismatches between demand of certain skills and offering continues which has led to labour shortages in some sectors and that, for its part, hampers growth. Focused and concerted efforts are needed with an accent on reforming education and on measures aimed at regional development.

The constant growing of sectoral minimum social security thresholds the aim of which is to reduce grey economy and increase the government revenues show a bad side effect over specific segments of the labour market. As those thresholds are getting very close to the average wages in certain professions, it is possible this to inadvertently price out many people, especially in less developed regions. Besides, the analysis says, these thresholds impose higher effective social tax rate for those employees whose salary is below the threshold.

Bulgaria's external position remains highly negative, is another finding in the Commission analysis, although it is noted that the latest developments are in the right direction. The balance of external indebtedness since 2010 has been unwinding. The repayment of debt and the nominal economic growth have reduced indebtedness as a GDP share, and the expectations for a future economic growth and development of the current account suggest a gradual improvement of Bulgaria's net investment position globally. In order to ensure that, the Commission recommends more efforts to be invested in attracting capital in productive sectors and to improve the absorption of EU funds. It is also necessary to continue the efforts to achieve a sustainable level of external indebtedness.

Although the expansion of exports continues, there are concerns about a loss of cost competitiveness. The growth of unit labour costs still is a problem - the fastest growth in the EU. This probably will have an adverse effect on competitiveness thus posing risk to exports. A problem also is the indebtedness of the private sector. The debt of non-financial corporations has dropped in the period 2010-2011, but it remains very high in terms of a GDP share. In addition, a significant piling of other payments is registered such as trade credit, rents and other arrears for goods or services which represents a serious threat for the overall development of the non-financial corporate sector. The continued growth of bad loans of companies is a testimony for continued difficulties of the private sector.

The Commission recommends in this regard the challenge with reducing non-financial corporate indebtedness to be studied more deeply, as well as the delayed payments and uncertainty. A possible recommendation is to improve the insolvency framework by securing out-of-court settlements, but also by improving the efficiency of the judiciary - a problem which Bulgaria has been trying to resolve for 6 years in the framework of the Control and Verification Mechanism in the area of the judiciary.

A missed year

Looking at the last year's in-depth analysis of the macro economic imbalances in Bulgaria, it becomes clear that almost nothing has been done to address these issues. Then, too, the Commission warned of piling of problems with unemployment. In the last year's analysis, too, it was pointed out that the labour market has been hit exceptionally hard by the crisis, as a decline of 9% of employment is registered in the period 2009-2011 - the biggest in the entire EU. This time last year, the Commission warned that unless measures are undertaken, especially to address the the low-skilled segment of the market, this would significantly hamper the process of adjustment. If there are no reforms, a large share of the unemployment will turn into structural, was the Commission's warning last year. This year the 12 per cent unemployed are already a fact and although the Commission does not use the word "structural" in this year's report, it clearly points out that the share of long-term unemployment is increasing.

Both this year and in 2012, the Commission paid attention on skill mismatches on the labour market and especially on regional level. A year ago, the analysis recommended the government to adopt a comprehensive package of active measures to reform the labour market, the education and to conduct regional policies to ensure durable improvement of this indicator. Again, a year ago a major focus in the analysis was the fast growth of the unit labour cost which then, too, was growing with the fastest speed in the EU. And if last year the analysis mentioned the prudential fiscal policy as a precondition for stable economic environment in support of reducing private sector indebtedness, this year it is no longer is mentioned as a factor.

And judging from the pre-election programmes that flood the Bulgarian voters mainly with disputes "for" or "against" the flat tax rate, Bulgaria is again set to miss another year. Although the caretaker government has set a target to address some of the problems, it is unrealistic to expect any results. Marin Raykov's cabinet is committed to ensure regular payment of social benefits, to upgrade measures to limit unemployment growth and to create conditions for opening of new jobs. In his programme it is envisaged to seek adaptation of training programmes aimed at the needs of the businesses in regions and sectors, and also to resume the trilateral dialogue in the search of working solutions - an effort that has failed.

Against the backdrop of the latest public opinion polls that give a clear advantage of the party that most recently ruled the country, GERB, before the socialists, and given also the significant rise of support for the nationalist party Ataka which struggles to increase the minimum wage at 1000 BGN (500 euros), we can expect that Bulgaria will continue to be part of the imbalances procedure, already left by Finland, and most probably next year we will read similar conclusions. 

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