FEATURE-Foreign investors leave worried Bulgarians behind

* Foreign investment plunges, prompting public anger

* Fresh capital from China, Middle East no cushion yet

* People blame government, but labour elsewhere is cheaper

By Tsvetelia Ilieva

STAMBOLIYSKI, Bulgaria, July 1 (Reuters) - For Gergana Gecheva, laid off when Bulgaria's biggest paper mill closed in her hometown this month, the situation is clear: "This town is dying," she says. "Change has to start from the top."

The 48-year old had worked for 30 years in the mill when its owner, South African-based Mondi, shut it because global recession had slashed demand.

First opened in 1957, it had been a provider of indirect work to one in three people in this impoverished town of 12,000 in the Thracian valley some 120 km (75 miles) south of Sofia.

It's the same story in small towns across Bulgaria: foreign firms are packing up and quitting one of the newest, poorest, and most remote corners of the European Union just as it heads to a parliamentary election.

"No-one thought it would come to this," said Gecheva, looking at the deserted yard of the mill in Stamboliyski in silence broken only by an occasional train at the station.

In a town developed as a food-processing centre in the 1930s, the only other big employer -- a communist-era canning factory -- closed last decade.

The people of Stambolyiski and economists blame government incompetence for the fact the Balkan country was unprepared for crisis, lacking high-end manufacturing and at the mercy of fast-moving producers and developers.

They say Bulgaria is vulnerable because it did not take advantage of a recent economic boom to spruce up infrastructure or tackle corruption and crime.

Foreign cash inflows have halved to 995 million euros ($1.38 billion) in the first four months from a year earlier. Some Chinese and Middle Eastern investment is trickling in, but economists expect foreign direct investment to at least halve to about 3-3.5 billion euros for the full year.

The crisis has not yet been as painful as in Latvia or Hungary, but a survey in early June by state-funded pollster NPOC found 38 percent of Bulgarians were afraid they would lose their jobs in the next six months and more than half had scrapped plans for summer holidays or home improvements.

The Socialist-led government, headed according to opinion polls for defeat in the July 5 elections, says unemployment currently at 7 percent will stay below 10 percent.

It argues that years of prudent fiscal policies and an accumulation of 22.7 billion levs of hard currency reserves, over 30 percent of GDP, will cushion the economy.

But about 5,000 people are losing their jobs each month, and analysts warn Sofia's next government risks having to seek a loan from the International Monetary Fund similar to those sought by Romania, Hungary and Latvia.

"There is no urgent need to get money now ... but obviously on the macroeconomic side, someone has turned off the switch," said Lars Christensen, economist at Danske Bank.

PUBLIC DISCONTENT

Anger about the failings of the Socialist-led coalition now dominates public debate and the election is widely expected to hand power to the opposition GERB party of straight-talking Sofia mayor Boiko Borisov.

Opinion polls show some 80 percent of Bulgaria's 7.6 million people want the government to go.

"People are scared," said Sonya Chatalova, 46, who also worked at the paper mill. "We are angry at the politicians for allowing us to be treated like this."

The company on which the town of Stamboliyski relies has dismissed most of its staff of 500, but says it might reopen the plant once global demand picks up if wood prices come down.

Elsewhere Turkish and Greek textile companies have shut down, British and Spanish developers have frozen real estate projects and foreign-owned metals and fertilizer plants have cut production.

Agropolichim, owned by U.S. Acid&Fertilizer, steelmaker Stomana, part of Greek group Sidenor, and Holcim Bulgaria, part of the Swiss cement maker Holcim, have all reduced production and staff.

Economists say fresh capital could come from China, the world's third-largest economy which is eager to diversify its investment base, or from some Arab countries.

Chinese car manufacturer Great Wall last month started building a car plant, while other Chinese investors are looking into energy projects including wind farms and an oil refinery.

Earlier this year, an investment fund of the government of the Sultan of Oman bought a minority stake in Bulgaria's Corporate Commercial Bank and said it was looking into potential investments in tourism and energy.

The Emir of Qatar visited twice this year to explore potential in real estate, tourism and energy.

Such projects offer hope, but not a practical cushion.

ECONOMIC IMBALANCES

Some analysts say one-third of the 150,000 people working in textiles, where annual turnover is estimated at 2.5-3 billion euros, will lose work this year as investors seek cheaper labour in places such as Moldova and Ukraine.

Construction, real estate and financial services -- which drew most of Bulgaria's 6 billion euros in annual foreign investment in the past four years -- are at a standstill.

Bulgaria's current account deficit remains at a dangerously steep 22 percent of GDP, one of the highest in the EU, and years of living on cheap credit have exposed cash shortages.

If Sofia is forced to deplete its foreign currency reserves to cover the deficit, Bulgaria may eventually be forced to abandon the peg of its currency, the lev, to the euro. The peg is seen by many as a guarantee of economic stability.

Analysts say Sofia must offer a realistic promise of improvement in infrastructure and show results in fighting graft to restore Brussels' trust so that it can efficiently tap over 11 billion euros in EU funds and lure back investors.

But for the people in Stamboliyski, disillusioned and tired after two decades of painful market reforms since communism collapsed, hopes for any prosperity have vanished.

"It is really bad. Unemployment will jump. What shall we do? We would have to steal, what else," said Todor Mitrev, 35, construction worker and a father of two, who has not had a steady job for two years. "It's the government to blame." (Editing by Sara Ledwith)