A. Major Trends and Outlook

Demographics & Economic Situation

Source: Factbook.net

1. A Stable Economy

The ruling Union of Democratic Forces (UDF) Government has made a clean break with the failed policies of the early and mid-1990s. In this, the Bulgarian Government received the backing of international financial institutions, and committed itself to sound financial and structural policies as the only way out of crisis.

Since July 1997 the Bulgarian government has been operating under a currency board arrangement (CBA). Until December 31, 1998 the Bulgarian lev (BGL) was tied to the German mark (DM) at a rate of BGL 1000 to one mark. Since January 1, 1999, the lev has been fixed to the euro at an exchange rate of 1,955.83 levs to one euro. On July 5, 1999, the lev was redenominated, with BGL 1,000 replaced by one new lev. Thus BGN 1.00 equals DM 1.00. The Currency Board requires the Bulgarian National Bank (BNB) to hold sufficient foreign currency reserves to cover all the levs in circulation including the lev reserves of the banking system; the BNB can only refinance commercial banks in the event of systemic risk to the banking system; and the government is limited in taking on new financial liabilities or providing sovereign guarantees.

Bulgarian Government

Thanks to the CBA and its associated IMF program, inflation has been cut from nearly 600 percent in 1997 to only 6.2 percent in 1999. Official reserves rebounded from $400 million in January 1997 to $3,412 million at the end of 1999. Moody's Investors Service upgraded Bulgaria's credit rating to B2, while Standard & Poor's raised Bulgaria's long-term foreign currency credit rating to B+ with a positive outlook from B. Foreign investment, including participation by American investors, has also revived as macroeconomic stabilization and a friendlier business climate have taken hold. The closure of 18 troubled banks has also helped to increase confidence in the banking system. Following declines in GDP in both 1996 and 1997, GDP increased from $10,200 million in 1997 to $12,257 million in 1998, and to $ 12,392 million in 1999; in 1998 and 1999, real GDP grew by 3.5 percent and 2.4 percent, respectively. Official statistics underreport economic activity, with an unofficial market representing an additional 20 to 30 percent of the official GDP. This implies that disposable consumer income is higher than what is officially reported.

The UDF Government has made considerable progress in privatizing state-owned enterprises (SOEs). As of the end of 1999, about 71 percent of state-owned assets destined for privatization had actually been sold. The private sector contributed 48 percent of GDP in 1995, 52 percent in 1996, 59 percent in 1997, and 64 - 65 percent in 1998 and 1999; it should increase further with continuing privatization.

Unemployment increased to 19 percent in April 2000, but it is projected to decline to 13.5 percent by the end of 2000. The increase in unemployment was due to substantial layoffs at the large state-owned industrial enterprises under restructuring and liquidation. The GOB hopes to open about 250,000 new jobs by April 2001 through implementation of its public investment and employment programs. The Kostov government recognizes the importance of small and medium enterprises, which were virtually ignored by the previous Socialist government, for their ability to create jobs. The average wage of approximately $110 per month is one of the attractions for foreign investors interested in production in Bulgaria.

2. Near-term Outlook

With resumed growth prospects in the EU area, the IMF and the Government of Bulgaria envision a scenario of strong growth of 4 to 5 percent annually and single-digit inflation over the next several years. The Currency Board will help provide fiscal discipline, while balance of payments support from international donors will help Bulgaria fund transitional costs of economic reform and public investment. The GOB sees infrastructure investments as an engine of growth over the next several years. Between 2000 – 2001, the government plans to allocate approximately $807 million of the consolidated budget for public investment projects. The GOB also seeks to stimulate higher private investment and ultimately higher economic growth through a range of tax cuts negotiated with the IMF. Taxes on corporate profits and personal income and mandatory social insurance contributions are to be reduced in 2001.

The main impediments to medium-term economic prospects include excessive administrative requirements for entrepreneurs, lack of transparency in government economic and commercial decisions, and the potential for regional instability. Recent business surveys indicate that licensing and administrative requirements impose a heavy burden on the private sector, particularly small businesses. The government has completed a review of these regimes and has eliminated about 100 of these requirements in 2000.

Although the Bulgarian government has achieved some successes in the fight against organized crime and corruption, many observers believe that corruption and political influence in business decisionmaking continue to be significant problems in Bulgaria's investment climate. The problems range from the demand for petty bribes for government licenses and permits to nontransparent privatizations of major state enterprises. With regard to privatization, the government has relied heavily on controversial management-employee buyouts for smaller enterprises, and on use of foreign consultants to privatize pools of medium and large companies. The privatization framework has also included complex criteria for selecting buyers that has generated concerns about transparency and corruption. As a result, ownership transfer has been delayed and, in some cases, has provoked litigation. In the banking sector, privatization has proceeded with fewer problems. All banks except the State Savings Bank have either been sold or are well on their way to being privatized. The privatization process is slated to come to a close in 2000 with the sale of several large companies, notably the Bulgarian Telecommunications Company, Bulgartabak and Balkankar.

The potential for further instability in the region also poses challenges. In the aftermath of the Kosovo conflict, Bulgaria's principal trade and transport routes to Western and Central Europe, which pass through Serbia, have been seriously disrupted. The governments of the United States, the European Union and Southeast Europe have committed to a Stability Pact aimed at developing prosperity and stability throughout the region. In the Stability Pact context, international donors have pledged to assist Bulgaria in completing a series of priority infrastructure projects, including a second Danube bridge, Danube River ports modernization and a major upgrade of Sofia Airport. Under its Southeast Europe Initiative, the U.S. Government is encouraging greater American trade and investment in Bulgaria. The Overseas Private Investment Corporation (OPIC) provides financing and political risk insurance for projects in the country and has established a regional investment fund. The U.S. Government has also proposed legislation which would grant unilateral trade preferences to Bulgaria and other Southeast European countries.

The United States has also facilitated direct dialogue between governments in the region through the Southeast Europe Cooperation Initiative (SECI) on a range of issues. SECI is helping to reduce trade and transport barriers and has given the impetus to a regional anti-crime center, among other activities. The South Balkan Development Initiative (SBDI) has investment $30 million in developing transport links between Albania, Macedonia and Bulgaria.

As a relatively small market in the Balkans, Bulgaria will have to make extra efforts to attract investors--by improving transparency, for example--as well as by more fully marketing its many advantages, including a highly skilled, low- cost labor force and proximity to both European and Near Eastern markets.

B. Principal Growth Sectors

The service sector of the economy, which generates approximately 56 percent of Bulgaria's gross domestic product (GDP), continues to experience the highest growth. Most private sector activity involves some form of trade or retail. A small percentage of new companies are involved in manufacturing. Private sector growth is greatest in construction; the food sector (meat, dairy, bread); maintenance and repair of electronic tools/equipment, household appliances and automobiles; financial services such as insurance and lending; some health care services and tourism.

Much of Bulgaria's earlier economic strength was in heavy industry, powered, until the mid-1990's, by subsidized energy from the former Soviet Union. State-owned chemical, petrochemical and metallurgical plants have been privatized, but whether they can compete effectively in a wider international market remains to be seen. Over the next few years there may well be more growth in light industry, led by electronics, textiles and food processing.

Bulgaria was formerly renowned for agricultural output, but the sector now accounts for just 17 percent of GDP and employs a fifth of the population. Restitution of land to private owners has been complicated. Many private holdings are small and can only be serviced with decent equipment or irrigated adequately if the owners band together in some form of cooperative. Such efforts are slowly underway. A shortage of fodder has led to distress slaughtering, raising questions about the adequacy of herds to feed the domestic population. The good news is that price liberalization should encourage more output, especially as discretionary income gradually rises.

Agriculture has the potential to make Bulgaria basically self-sufficient in grains (wheat, corn and barley) but will require animal protein feed such as soybean meal for the foreseeable future. When the livestock sector recovers, genetic material and animal feed ration components, perhaps including corn, will also need to be imported. Prospects are excellent for further increases in hard currency earnings for wine and cheese.

C. Government Role in the Economy

The state's presence remains sizeable in Bulgaria's economy. As of December 1999 about 47 percent of state enterprises have been privatized, and the public sector occupies 35 percent of GDP. In 1998, 1,090 enterprises or parts of enterprises were privatized for $985 million, while in 1999, 1,224 enterprises or parts of enterprises were privatized for $2.518 billion.

Priority sectors for privatization are: tourism, food processing, agriculture, heavy industry and engineering, textiles, and construction/building materials.

The government's aim is to privatize all state-owned firms except for the public utilities and a small number of strategic enterprises. These include Bulgarian State Railways, Bulgarian Posts, Education & Sciences, El Bi Bulgarikum (producer of yogurt bacteria), National Cadastral Company, National Geodesy Company, Geopribor (geological equipment), Cartography Company, Geozashtita (geological protection), and Vodokanalenzhenir (water pipe engineering). Legislation mandates that the state retain at least a 51 percent interest in certain enumerated companies: the Ruse and Varna merchant and passenger marine fleets; major airports; the ports of Burgas, Lom, Varna and Ruse; Varna's aquatic ecological company; Transtroy road/rail/port construction company; and highway construction companies.

The GOB's privatization program is being implemented in three ways: capital market offerings, mass privatization, and cash privatization. The offerings on the capital market are small. In the mass privatization program on the Czech model, all Bulgarian citizens and company employees are eligible to receive free vouchers for company shares or shares in privatization funds. The Council of Ministers approved a list of 1,050 companies slated for mass privatization in industry, agriculture/food-processing, transport, construction, tourism, trade, energy and culture. The second wave of the mass privatization program began in January 1999 based on a scheme that allows a wider range of participants and different means of payment and does not set a minimum price per share. Share prices are weighted against the average of all bids offered at centralized public auctions. According to the new scheme, there is no fixed number of enterprises to be privatized, but at least 5% of each state-owned enterprise should be offered for mass privatization. At the first centralized public auction, the government offered shares of 31 companies worth approximately $120,000.

Third, and most significant for potential foreign investors, is the cash privatization program, in which investors, including foreign investors, may negotiate to buy smaller state enterprises from government ministries and larger ones from the Privatization Agency, and municipally owned enterprises from the respective municipality. The Privatization Agency has in many cases hired foreign consulting firms to analyze the value of and to market important state enterprises. While the GOB's cash privatization program offers some excellent opportunities, the process has been criticized as slow, cumbersome, and challenging for foreign as well as Bulgarian investors.

Some potential investors have expressed their frustration at a lack of transparency in the process, while others are unhappy with inflexible procedural decisions that lack a commercial justification.
To stimulate investor interest, the Privatization Agency has encouraged the use of Brady bonds (debt-for-equity swaps) in the privatization process. These have been used in the purchase of a major hotel and two beer breweries. Only Discount Bonds (DSCs) and Front Loaded Interest Reduction Bonds (FLIRBs) may be used in the privatization of state, as opposed to municipal, assets. Bulgarian bad debt bonds (ZUNKs) also may be used as a payment instrument in the privatization process. ZUNKs can be purchased on the local market at a 30-35 percent discount and are an acceptable form of payment for privatization deals at a 40 percent premium on face value.

The 2000 budget is based on the GOB's three-year macroeconomic framework agreed with the IMF, which envisages a general government deficit of up to 1.4percentpercent of GDP with budgetary revenues and expenditures of 36.6percentpercent of GDP and 38percent of GDP, respectively. Budgetary priorities include successful implementation of the social-insurance and health-care reforms which will incur additional government expenditures of 0.6percent of GDP, a 10percent increase of the average civil servants' wage, contingency expenditures of 0.8percent of GDP in case costs of reforms exceed original estimates, and margins to allow a tightening of the fiscal stance if needed.

D. Balance of Payments Situation

Bulgaria's balance of payments situation is currently stable. According to the Bulgarian National Bank, Bulgaria's current account deficit was $659 million or 5.4percent of GDP and the trade deficit reached $1.064 billion or 8.7percent of GDP in 1999. As of December 1999, external debt was $9,989 million, while foreign reserves were $3,412 million. Fiscal discipline and limited growth of real wages should limit future current account deficits. In 1999, the higher current account deficit was completely financed by foreign direct investment of $770.4 million and additional financing from the International Financial Institutions. The United States has pledged $25 million to Bulgaria for balance of payments support. Bulgaria's currency board arrangement, supported by its three-year agreement with the IMF and sound macro-economic policies, provide for a stable balance of payments for the foreseeable future. In the opinion of one major American brokerage firm, Bulgaria's external debt is high but not out of proportion to that of other emerging markets.

E. Infrastructure

1. Telecommunications

Source: Factbook.net

Bulgaria has the highest penetration of telephone service in Eastern Europe, with 39.34 telephones per 100 persons. Bulgaria's telecommunications network is owned by the Bulgarian Telecommunications Company (BTC), which in turn is regulated by the newly created Ministry of Transport and Communications. Over 95 percent of Bulgaria's telephone subscribers can make automatic domestic long-distance calls. As of January 1, 2000 BTC had a total of 3,254,742 telephone subscriber lines-- 2,394,118 residential subscriber lines, and 860,624 business subscriber lines. Eighty five percent of the residential subscribers and 70% of the business subscribers use analog lines while only 30% of the business subscribers have digital subscriber lines. Central Sofia, the location of most U.S. firms, already has largely moved to seven-digit digitally-switched lines offering direct-dial access to the United States. In 1999 140,000 new subscriber lines were installed. The BTC network is directly connected to over 45 telecommunication operators. Regional connection is digital transmission over optical cables. More distant countries such as the United States, Canada, Japan, and China are connected over international satellite systems.

BTC's main objective in its telecommunications network development is its technological upgrade through new digital switching and transmission infrastructure. BTC's middle-term priorities for the period until its monopoly over the fixed network expires in 2002 are in the area of the telecommunications network technological modernization. These priorities include: building up the digital transit network; continuation of digitalization; speeding up of the implementation of modern telecommunications and information services including ISDN; and accelerated extension of the subscriber access network including broadband. The execution of these priorities will significantly increase BTC competitiveness before the liberalization of the telecommunications market after January 1, 2003.

The U.S. Trade and Development Agency has granted funds to BTC for a feasibility study for improvements in rural telephony through the use of wireless local loop technology.

Bulgaria has an analog cellular telephone network (450MHz) operated by Radio Telecommunications (Mobifon), a joint venture between Cable & Wireless (49 percent), Bulgarian Telecommunication Company(BTC) (39 percent) and Radio Electronic Systems (12 percent). Bulgaria has one digital cellular telephone network operated by the Bulgarian company Mobiltel which uses the Pan-European digital GSM standard (900 MHZ). Radio TELECOM/Mobifon operates one of two national paging systems. The second system is operated by Link Communication Systems of the United States using Motorola technology.

Bulgaria has a large number of very small, unregulated Internet service providers. Current dial-up access speeds over regular lines generally offer a reliable connection up to only 33,600 bps. In 1999 BTC introduced ISDN, which is a new service for the Bulgarian market. ISDN has been mostly used for Internet connectivity. Currently ISDN is available in the main cities in Bulgaria, where there is the highest concentration of businesses. Over 40% of the Internet access provided in Bulgaria is effected through the BTC Internet network.

After terminating, on July 31 2000, the 18 months of negotiations with the Greek-Dutch consortium OTE/KPN, the only bidder, for privatization of 51 percent of the Bulgarian Telecommunications Company (BTC), the Government of Bulgaria has decided to change the privatization strategy of BTC and to sell the second GSM license separately from BTC. The second GSM operator is expected to introduce highly needed competition on the mobile market, which through increase of quality and decrease of prices will increase subscribers and will make the service more accessible to end-users.

The Ministry of Transport and Communications is exploring various options for privatizing BTC before its monopoly ends. One option is to bundle the sale with a third GSM mobile phone operator. To facilitate the BTC privatization, and to improve the regulatory environment for telecommunications, the Committee on Posts and Telecommunications (the supervisory agency of the GOB over BTC) drafted a new Telecommunications Law to replace the old Communist-era 1975 law. The new law went into effect on January 1, 1999.

Bulgaria's broadcast and cable media are also expanding. Additional radio and television licenses are being granted for nationwide coverage, and U.S. companies are investing in cable television. Companies such as Fox TV, through its subsidiary Balkan News, and Home Box Office are also aggressively entering Bulgaria's market for content-driven programming.

2. Road Transport

The Ministry of Transport and Communications oversees the transport sector as a whole. The road network is administered by the "Roads" Executive Agency (former General Road Administration)which falls under the Ministry of Regional Development and Public Works portfolio. There are 37,000 kilometers (km) of roads in Bulgaria, although only 250 km are four-lane highways--and most of that are the 160 km between Sofia and Plovdiv. Regionally, only Romania has a lower road density than Bulgaria.

Roads in Bulgaria are not up to U.S. standards. Streets in Sofia are frequently made of old cobblestones, and potholes are common on main streets and side streets. There is much unmarked road work on inter-city roads. The U.S. Embassy in Sofia recommends against driving Bulgaria's roads at night.

Sofia Municipality has undertaken an ambitious program for reconstruction of the main city rings and restructuring and repavement of the main feeder routes from the most populated living areas. This is aimed at developing not only a better road superstructure but also road substructure. Financing for the project to improve the city's main thoroughfares and rings amounts to $77 million, and the main source of funding is the Eurobond issue proceeds.

Just one bridge, at Ruse, spans the Danube between Bulgaria and Romania. The Kosovo situation and other political troubles involving Serbia have made the shorter route to Western Europe across the Bulgaria-Serbia border problematic, resulting in greater traffic between Bulgaria and Hungary via Romania and requiring a ferry crossing at Vidin. On February 7, 2000 in Brussels an agreement was signed between Romanian Minister of Transport Basescu and Bulgarian Finance Minister Radev on the construction of a second bridge across the Danube. On February 23, 2000 an Expert Paper was drawn up by the Expert Groups of the Governments of Bulgaria and Romania on the exact location of this bridge -- along the Southern part of the Pan European Transport Corridor IV between Bulgaria and Romania, in accordance with the Transport Infrastructure Needs Assessment (TINA) Project Final Report of October 1999. Following these preparatory steps, on March 27, 2000 a Declaration by the Governments of Bulgaria and Romania on the construction of a bridge over the Danube at Vidin-Calafat was signed by the Prime Ministers of the two countries.

Bulgaria currently has two border crossings with Turkey. Given steadily improving relations between the two countries, the Bulgarian Government has requested the reopening of a third crossing, which is likely to be favorably considered by Turkey. Three new border crossings will also be opened with Greece west of the current crossing at Kulata. Bulgaria, Greece, and Turkey are actively working to improve the border crossing conditions and to alleviate bottlenecks through the Southeast Europe Cooperation Initiative (SECI). In collaboration with SECI, the World Bank has prepared the Trade and Transport Facilitation in Southeast Europe Project (TTFSE) to help six countries in the region to improve border crossing infrastructure and alleviate border crossing bottle necks. The Bulgarian Government received a $7.4 million World Bank loan for implementation of the TTSFE project and $1.5 from the U.S. Government. $3.7 million will be funded from the state budget.

Bulgaria has many highway projects underway, including portions of the Trans-European Motorway (TEM). These include routes connecting Budapest with Athens via Vidin and Sofia and with Istanbul via eastern Bulgaria. The European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), the European Union's PHARE program, and the Bulgarian Government's budget are the main sources for financing improvements in the road network. Completion, modernization, and overhaul of different portions of the Trakia, Cherno More and Hemus motorways will be given out on concessions. The Plovdiv-Burgas highway section is expected to cost $500 million, while the Burgas–Varna section is expected to cost $300 million. There are also plans for a north-south road tunnel under Shipka Mountain estimated at $120 million.

The U.S. Trade and Development Agency has provided a number of grants to Bulgaria, as well as to the Former Yugoslav Republic of (FYR) Macedonia and Albania, for feasibility studies and for basic maintenance equipment to improve the regional road infrastructure, mostly under the South Balkan Development Initiative (SBDI). SBDI is a $30 million, multi-year program launched by President Clinton in February 1995 and managed by TDA. It gives U.S. companies an excellent opportunity to participate in the planning of transportation infrastructure development in Bulgaria. One major ongoing TDA grant is for a feasibility study for a Sofia Southern Bypass road to enable traffic from eastern Bulgaria and Istanbul bound for Greece and FYR Macedonia to bypass Sofia.

3. Railways

The Bulgarian Railway Company (BDZ) oversees Bulgaria's railway system. The railway infrastructure consists of 4,300 km of track. An estimated 61 percent is electrified (25 Kv, 50 Hz).

Failure to perform routine maintenance combined with the inability to purchase new equipment has resulted in a rapid and noticeable deterioration of the installed infrastructure. For example, an estimated 10,000 switches are worn. Nearly 85 percent of BDZ's maintenance equipment is obsolete. BDZ also requires new signaling equipment, aerial wires, communications system, and radio equipment.

The Bulgarian Government has a railway restructuring project which focuses on the repair of 414 km of main tracks, construction of an automated locomotive system, procurement of new railcars and repair of existing stock, and improvement of information and technical services. Bulgaria has received funds from the World Bank, EBRD, and EU-PHARE totaling $158 million, with the government contributing an additional $133 million.

Bulgaria also plans to complete a two-kilometer link with FYR Macedonia and to upgrade and electrify 80 kilometers of track between Sofia and the Macedonian border. This linkage is integral to the formation of the European East-West Balkan Transport Corridor No. 8, which is endorsed by the Governments of Bulgaria, FYR Macedonia and Albania, as well as by European Transport Ministries. Bechtel prepared a comprehensive feasibility study of this corridor's economic competitiveness in the region for TDA under SBDI. The Sofia-Skopje rail link is expected to require $180 million.

The Bulgarian State Railway Company (BDZ) plans the electrification of 200 kilometers of existing rail track on the road to Turkey between Plovdiv and Svilengrad. Along with electrification, the track needs communications lines and rail safety equipment.

One of the main concerns of BDZ is commercialization of its activities through outsourcing and attracting private operators. The U.S. Trade and Development Agency's Southeast Balkan Development Initiative (SBDI) funded a research study to provide ideas and options for BDZ.

4. Ports

Bulgaria has two major ports on the Black Sea, Varna and Burgas. Both act as East-West transport corridor gateways of Bulgaria. Port facilities are generally adequate for bulk commodities, but lack facilities for special handling. Rehabilitation of both ports is planned.

Bulgaria has plans for a $300 million expansion of Burgas Harbor, to include new ro-ro, ferry, container terminals, and new facilities for general and bulk cargo. The Japan Fund for Reconstruction and Development provided a $120 million 30-year 2.58 percent interest loan with a ten-year grace period to the Bulgarian Ministry of Transport and Communications for construction of a new container terminal at Burgas. They also initiated a project to improve the breakwater facility in the port of Burgas. The U.S. Trade and Development Agency has also provided $300,000 for a feasibility study of a intermodal cargo terminal for the port of Burgas.

The EBRD has provided technical assistance to Varna for its master plan preparation and assistance concerning its container and grain handling facilities. The Varna port master plan envisages for six new terminals to be built by 2005--for general cargo, container terminal, metals, fertilizers, grain and petroleum products. The terminal for chemicals is already built and was developed in cooperation with the German Oil Tanking (with foreign investment of DEM 93 million). The port management announced officially another strategic partnership for registration of a joint-venture company for a cement terminal with the new owner of Devnja Cement, the Italian Italchimente. The policy of Varna port management is to structure strategic partnerships with companies which have cargo traffic to, from and via Varna port.

Ruse, a Danube port, is also commissioning a feasibility study on development of its port facilities.

Intermodal transportation is a new approach for Bulgaria. It provides freight forwarding and route alternatives. With joint efforts, Sea Land Services, Inc.(USA), U.S. Trade and Development Agency and the Bulgarian Ministry of Transport and Communications recently completed two feasibility studies to establish a rail-truck intermodal terminal to handle ocean containers in Sofia and Burgas.

5. Air Transport

There are three international and seven domestic airports in Bulgaria. Sofia Airport is the largest in the country and handles most international traffic. All are owned by the central government but are required to operate independently on commercial principles.

a. Sofia Airport

b. Sofia Airport Cargo Terminal Construction

c. Burgas Airport Modernization

d. Varna Airport Modernization

e. National Air Traffic Service Center Phase III

f. Balkan Bulgarian Airlines