INVESTMENT OPPORTUNITIES IN BULGARIA: COUNTRY AT GEOGRAPHIC CROSSROADS
The international financial markets crisis since a couple of months will have substantial impact on Bulgaria. According to expectations the country will suffer certain losses, but at the same time the crisis will bring new investment opportunities to Bulgaria. The political and economic stability, the clear and comprehensive government program for reforms, supported by strong pro-reforms majority in Parliament, will guarantee sustainable economic growth and increasing inflow of foreign investment in Bulgaria for the next years.
Economic Reforms since 1991
Bulgaria began the transformation of its command economy in February 1991. The economic policy included standardised stabilization program with floating exchange rate aiming at limiting the inflation after liberalization of trade and prices. The rapid pace of the early stages of Bulgarian economic reform (1991 to mid -1992) was widely praised by the international community. The transformation of the Bulgarian economy into a market-oriented system has been retarded by continued political and social resistance. Until early 1997, the economic reforms underpinning the transition process were subject to a high degree of instability and lack of decisiveness in economic policy. In late 1996/early 1997 an overall financial , economic and social crisis developed.
Finally the Government ,which took office in May 1997, has overcome the immediate economic crisis and has prepared a comprehensive program of financial stabilization and structural reforms which has been successfully implemented since. It consists of two main components: a macroeconomic stabilization program and structural adjustment and reform program.
In July 1997 Bulgaria entered a new phase in its economic stabilization and the transition to market economy. Admitting the need for reforms, the government began overdue reforms - closing some banks, cutting off lending to others, and moving to liquidate insolvent enterprises. Accelerated privatization is the core element of the economic program along with the fixed exchange rate and currency board principles in monetary policy.
The currency board arrangement in Bulgaria introduced on July 1 1997 a fixed exchange rate regime pegging the lev currency to the German mark at the rate of BGL 1000 per mark. The exchange rate will remain at that level until the Bulgarian lev is pegged to the Euro. The currency board institution had proved it can stabilize the financial system and the banks, enabling the cabinet to focus more on restructuring the economy and boosting investment. It had solved many of the country's problems. It had brought about low inflation, stable interest and foreign exchange rates, accumulation of reserves.
Monthly inflation has come down from a peak of 243 per cent in February 1997 to deflation figures for the first eight months of 1998 (the average annual inflation in 1998 will be about 5 per cent). Foreign exchange reserves are over US$ 2,885 billion and they could guarantee the six months imports of Bulgaria. Today Bulgaria enjoys a healthy, competitive and capital adequate bank system boasting a 5.2 per cent annual interest rate, determined by the market of government treasury bonds. Since last year harsh budget restrictions have been imposed. The budget deficit for 1997 was 2.47 per cent. For the first time in the transition period Bulgaria has had a budget surplus which by the end of the first quarter of 1998 amounted to 1.5 per cent of the predicted GDP.
The prognosed 1998 to 2000 economic growth is based on the expected boom of the investment demand in the modernization and technological innovation of Bulgarian industry. Investment revival in its turn is associated with speeding economy restructuring through privatization which should secure resource to go into the reconstruction and renewal of no longer state-owned production capacities. 1998 budget macroframe has set a GDP growth of 4 per cent by adjusted prices. Gross investments into Bulgarian economy are expected to grow in volume to 12,5 to 13 per cent of GDP in 1998 and to keep steadily increasing in the aftermath to some 17 to 18 per cent in year 2000. (For comparison the same index for 1996 and 1997 is 11,8% and 8,9% respectively.)
Privatization and economic restructuring
Until 1997, restructuring and privatization of Bulgaria’s enterprises was very slow. Last year Bulgaria registered substantial acceleration of privatization and growing direct foreign investment accompanied by important revising and supplementing of regulation aimed at encouraging both of those processes. The new government instituted a radical program under which the main loss-making enterprises are either being liquidated, or have been given protection from creditors until the end of 1998 but denied access to further private credit until they are privatized.
Since the offset of privatization efforts a total of country-s 25% of long-term tangible fixed assets has been privatized of which approximately 15 through cash privatization and 10% through voucher privatization. By 1999 year end an estimated 70% of the state property will have passed into private hands. In the existing restrictive macro- and micro-environment crucial in the continuous stabilization and economic growth is expected to be the role of the fast restructuring of Bulgaria’s economy via privatization and drawing foreign investment
A welcome sign is that foreign investment is at last picking up, but it still remains smaller in comparison to many other Central and East European countries. Foreign direct investment for the entire period of 1992-1997 amounted to USD 1.403 billion. The Foreign Investment Agency foresees current year direct foreign investment to be 1,45 bln dollars and the portfolio investments to be around 250 dollars. These estimations have already been readjusted with lower figures but on the whole it is expected that the threshold of USD 1 billion will be exceeded.
On September 25 1997 IMF’s Board of Directors approved a three-year agreement with Bulgaria which foresees lending around USD 840 mln. The IMF gave a positive evaluation of Bulgaria’s efforts towards economic stabilization and fast structural reform. The new three-year agreement creates a framework for steady economic growth. For the first time in eight years the government approved a short-term investment program. It provides till the year 2001 for more than USD 6 billion investment volume. It would involve large infrastructure projects such as roads, airports, ports, pipelines, and energy projects.
Bulgaria is very poor in respect of energy resources. The energy sector of the country is as a matter of fact developed in the period after World War II, when Bulgaria invariably was under the political and economic influence of the former Soviet Union. An objective analysis reveals that the development of the energy sector under these conditions has both positive and negative aspects. The positive aspects are connected with the development of a well developed energy system network, including a wide spectrum of power stations (NPP, TPP (gas, oil, coal), a developed gas transportation network and infrastructure for delivery and processing of crude oil. It can be stated that energy production is the only systematically and methodically developed industrial sector in Bulgaria.
The negative aspects are connected with the unconformity of the scale and the capabilities of the Bulgarian energy system with the market principles. This system is enormous for the scale of the country, especially in respect of the capacities for power production and that increases the dependence of the national economy on the practically only supplier of the basic energy resources (in the past USSR, now Russia). For a long period of time (over 50 years now) an inadequate price policy, which has a very bad influence on the whole economy of the country, has been implemented. Only in the last two years a consistent political will has been displayed and steps toward the overcoming of this harmful unconformity are being made.
A perfect illustration of the influence of the inadequate price policy on the whole economy of the country is the 1996 crisis. The crisis was preceded by a non-real economic boost, based exceptionally on the energy-intensive branches of the industry (metallurgy, chemistry engineering) with energy prices (and more specifically electricity prices) lower than the internationally fixed. Thus an increase in the already record energy consumption of Bulgaria’s GDP was consistently enforced. According to World Bank’s estimate, Bulgaria’s economy is very energy- intensive: energy consumption per unit of output is 5 to 10 times more than that of the OECD countries, and about 4 times more than those of the market economies with similar levels of income.
What is the present situation and what are the perspectives for the development of the energy sector in Bulgaria?
As it was already mentioned, there is political will in the country and steps have been made towards the adjustment of the energy resources prices to market requirements. The energy-consuming branches had reduced their consumption and in the short-term no economic boost in metallurgy and chemistry engineering is expected. Under these conditions Bulgaria can assume the role of basic energy producer and exporter for the Balkan peninsula, as well as a center of the future regional gas- and oil-transportation network.
Power transmission network and generating capacities
Bulgaria is located in the center of the Balkan peninsula, it used to be and can be a unit connecting the other Balkan countries, and through them - Russia, Ukraine and Middle East countries. Now Bulgaria has a modern unified electric power system covering different types of sources. The country possesses two rings - 400 kV and 220 kV. Bulgaria’s power system has large transmission potential and can serve as an important unit in transporting considerable quantities of energy from one Balkan country to another. Transmission lines connect Bulgaria with all the neighboring countries. By an intersystem 750 kV connection through Romania the Bulgarian system is connected with that of Ukraine and via it - with the Russian system as well. Presently the system is interconnected with the systems of Ukraine, Moldova, Romania, Serbia, Macedonia, Greece and Turkey by transmission lines at 400, 220 and 110 kV.
Bulgaria has a powerful energy production system - 1.42 kW per capita. It has NPP, coal burning TPPs, HPPs, together with considerable pump storage stations which can serve for regulation of the loads in other countries as well, in some of which the power units are almost entirely HPPs or TPPs.
Presently the Bulgarian electric power system operates normally in parallel with the interconnected power systems (IPS) of the former CMEA member countries by means of intersystem power transmission lines - 750 kV Ukraine - Romania - Bulgaria, 400 kV Moldova - Bulgaria, 220 kV Ishalnitsa (Romania) - Kozloduy NPP, two triples 400 kV Tsantsareni (Romania) - Kozloduy NPP. Unfortunately at present the simultaneous operation of Bulgaria’s system with IPS and UCPTE is technically impossible.
Characteristics of the gas transmission and gas supply system
The use of natural gas in Bulgaria has more than 30 years history. In 1972 the transit from Russia through Ukraine, Moldova and Romania to Bulgaria was put in commercial operation. Today Bulgaria has a well developed transmission system - 862 km gas mains with diameters 500 - 1200 mm; together with the branches for the different consumers, the length of the national gas network is 1800 km. The capacity of the gas pipeline is 10 billion Nm3 per annum with pressure of 5.5 Mpa. The following transit mains traverse Bulgaria: to Turkey - 256 km, diameter 1000 mm and 6 billion Nm3 per annum; to Greece - 191 km, diameter 1000 mm and 2.4 Nm3 per annum; to Macedonia - 65 km, diameter 500 mm and 1.2 billion Nm3 per annum. The construction of a transit main to Serbia - 95 km, diameter 700 mm and 1.4 billion Nm3 per annum is forthcoming. Thus the total length of the transit mains to the neighboring countries will amount to 767 km with capacity of 11 billion Nm3 per annum.
Transportation, processing and consumption of oil and oil products
Bulgaria has a high potential for participation in the international market of oil products, because of its developed industrial system (oil refinery and oil chemistry), compared to the relatively low consumption of the national economy. The quantities of processed crude oil satisfy the country’s needs. The expert assessments show that in the future, after the implementation of a modern economic reforms strategy, Bulgaria will have enough capacity for petrol products export.
In this respect it is important to mention the projects for transit of crude oil through the country. The project for transportation of Caspian petrol to Western Europe through Bulgaria from the Russian port Novorossiysk to the Bulgarian port Burgas and a pipeline through Bulgaria and Greece to the Greek port Alexandroupulis has been discussed for more than three years. The project for transportation of crude oil from Burgas through Bulgaria, Macedonia and Albania to an Albanian port is less discussed, but equally important. From the point of view of Bulgarian interests the usefulness of these projects will be higher if the respective pipelines and harbor works allow for two-way utilization. Thus Bulgaria will have the opportunity to reduce its dependence on Russian oil.
Bulgaria has a well developed power system and in spite of the lack of its own energy resources due to its geographical position. It can be in a key position in the Balkan region as a electric power producer and distributing center for gas mains and pipelines. Cooperation of the leading companies in this field and a well-developed strategy for investments attraction in it are necessary to achieve this. The efforts and investments should be aimed mainly in the following directions:
· Ensuring the technical means for the parallel functioning of the national power transportation network with the UCPTE;
· Building of new gas mains (Iran - Western Europe, Turkmenistan - Turkey - Western Europe);
· Building of transit oil pipelines similar to: Bulgarian port Burgas - pipeline through the territories of our and other Balkan countries - Mediterranean port.
Recently Bulgaria’s cabinet adopted the country’s new energy strategy until 2010 envisaging an investment of more than US$ 946 million during its first stage until 2001, including liberalization of energy prices and implementation of new regulatory framework according to market principles.
Also important for the power consumption and production of energy as well as sphere for investment and cooperation are the areas of:
· Restructuring of the coal production;
· Modernization of the power producing capacities - rising their productivity and the safety and productivity of the NPP;
· Improvement of the effectiveness of energy consumption.
September 1998 Dr. Maria Prohaska
Economic Program Coordinator
Center for the Study of Democracy
Dr. Kiril Velev
Foundation “Ecological and Efficient Energy Comsumption”
CEO, Petrol Engineering, JSc