SOFIA, March 3 (Reuters) - The European Union’s poorest member Bulgaria is slowly recovering from a deep recession which has slashed incomes and increased unemployment, hitting the popularity of its centre-right government.
The economic slowdown has forced the Balkan country to cut spending and freeze public salaries and pensions to rein in its fiscal deficit to avoid putting pressure on Bulgaria’s currency peg to the euro.
Austerity cuts, delayed reforms and a recent bugging scandal which raised suspicions of high-level favouritism have eroded support for the minority government, but it still has a grip on power thanks to backing of the nationalist Attack party.
The government of Prime Minister Boiko Borisov needs to deliver results in fighting corruption and organised crime to maintain EU trust, win investor confidence and ensure entry into the EU border-free Schengen area.
Below are the main political risks for Bulgaria.
Support for Borisov’s GERB party has slowly eroded since it won elections in 2009 and has been further hit by allegations of political favouritism and rising food prices, dropping to 26 percent versus 40 percent when elected. [ID:nLDE71R08E]
According to transcripts leaked to media, Borisov allegedly offered a brewery owner protection from customs checks and the opposition Socialists said it implied high-level favouritism. Borisov has denied any wrongdoing and said the leaked tapes were a result of his push to sever links between high-level corrupt officials and organised crime bosses. [ID:nLDE70J22X]
Elections late this year for the largely ceremonial post of president and for city mayors could herald a shift in the balance of power.
Socialist President Georgi Parvanov has signalled plans to return to active politics and analysts say he could emerge as a popular figurehead capable of mounting a challenge to Borisov, whose own mandate runs until 2013.
What to watch:
— How much support has GERB lost over the allegations of favouritism? While its grip on power is unlikely to loosen in the short term it could face growing opposition and no-confidence votes in parliament.
Political uncertainty is unlikely to affect the lev currency because it is pegged to the euro, but could increase the cost of insuring Bulgaria’s sovereign debt and make it more expensive to borrow money.
Corruption and organised crime are still a blight on the Balkan country even 20 years after the fall of communism. Favouritism and a need to grease palms to secure business deals are a deterrent to foreign investors and crimp economic growth.
Germany and France have urged Brussels to delay bringing Bulgaria and Romania into the EU free travel Schengen zone this March because of concerns over corruption. [ID:nLDE6BL0Q5]
Recent verdicts against two senior officials for abuse of power and embezzlement are steps in the right direction and Sofia has won praise from the EU, but it still needs to maintain efforts and put more high-level corrupt officials behind bars to prove it is serious. [ID:nLDE70P10M]
What to watch:
- Will the government maintain its political will to crack down on corrupt practices? This is unlikely to move markets in the short term but sends an important signal that Bulgaria is becoming an easier place to do business.
The cabinet sees the economy expanding by 3.6 percent this year after rising exports pulled it out of recession in the second quarter of 2010, but growth will be slower as the real estate boom which underpinned previous expansion will not be repeated. [ID:nLDE7060YV]
The cabinet froze salaries and pensions and cut ministry spending by about 20 percent in 2010 and is keeping spending at similar level this year to avoid further drops in demand.
But if growth remains anaemic, tax revenues will be lower than expected and social spending probably higher, scuppering government plans to halve the budget deficit to 2.5 percent.
Inflation rose to an annual 4.5 percent at end-2010 from 0.6 percent in 2009 mainly due to a spike in food prices.
More than 120,000 workers have lost their jobs in the past two years and unemployment jumped to 9.2 percent in 2010. More than a fifth of the population live with less than $6.50 per day, according to the latest available data from 2008. The number of unemployed younger than 29 doubled in the last two years to about a fifth.
What to watch:
- Will growth undershoot government forecasts? This could increase the cost of insuring Bulgaria’s debt and make it harder to tap international markets.
- Will the cabinet loosen fiscal policy to maintain its popularity ahead of local and presidential polls in the autumn?
The cabinet has pledged to overhaul the inefficient healthcare system, but reform hit a snag as doctors protested hospital closures and underfunding. Threats of massive strikes forced it to water down the pension system reform and it has stalled a privatisation programme. [ID:nLDE70O0B0] The use of EU aid improved in the past year but the country still used only about ten percent of the 7 billion euros available through 2013, mainly due to slow administration and a lack of well-prepared projects.
What to watch:
- Will Bulgaria push ahead with reforms or will popularity concerns and fear of public unrest delay overhauls?
- Will the government be able to improve EU funds use? Failure to do so is unlikely to move asset prices but may deter foreign investors, slow infrastructure improvement and undermine economic recovery.
For political risks to watch in other countries, please click on [ID:nEMEARISK] (Editing by Sonya Hepinstall)