Bulgaria Infrastructure Report Q3 2009

Bulgaria’s economy and political situation are in a state of flux, pending the national elections in July.

The European Commission reinstated the Instrument for Structural Policies for Pre-Accession (ISPA) and pre-accession assistance (PHARE) funds for projects in Bulgaria, providing a boost for the ruling Socialist Party. This was in response to the government taking strides to tackle corruption in the infrastructure sector. Nevertheless, this may be too little, too late as the popularity of the Socialist Party has been steadily deteriorating. BMI’s Country Risk analysts expect a victory for GERB, the leading opposition party, whose platform centres on a tough stance on corruption and a promise for an immediate stand-by agreement with the IMF to tackle the economic crisis.

A change in government will result in major policy changes, which could also affect the infrastructure sector. Assuming victory for GERB, the party’s pledge to vehemently fight corruption does give reasons to be optimistic that at least EU funds for infrastructure should not be suspended again on the grounds of corrupt practices. The possibility of an agreement with the IMF, which will be accompanied by a reining in government expenditure and conservative fiscal policy, will limit the government’s ability to spend public money on infrastructure projects, though we do not anticipate this including the BGN5.6bn (US$3.6bn) fiscal stimulus plan that is in place to combat the crisis.

Nevertheless, the decision to reinstate EUR1.25bn in funding for transport projects will catalyse construction for several major road projects that were at an impasse owing to the lack of funds, such as the Trakia and Struma highways. In addition, and perhaps most importantly, the vote of confidence from the EC encourages private investors. Already, Deutsche Bank has expressed its intention to act as financier for projects in Bulgaria.

The energy and utilities sector saw some major developments this past quarter as well. The governments of Russia and Bulgaria began negotiating a EUR3.8bn loan to finance the Belene nuclear power plant, while Bulgarian Energy Holding (BEH) transferred its stake in the Trans-Balkan Pipeline Consortium, responsible for the Burgas-Alexandroupoli oil pipeline project, to state-owned Technoexportstroy.

For this quarter, BMI maintains its concern for Bulgaria’s infrastructure sector as the tight credit conditions on global markets are affecting project financing operations while the government relies on private sector financing to support long-term projects. According to data from the Bulgarian National Bank, the foreign direct investment inflows were 50% less in the first four months of 2009 compared with the same period in 2008, while preliminary Q109 data from the national statistics agency show that construction industry value declined by 1.3% compared with Q108. In BMI’s Q309 Bulgaria Infrastructure Report we have slightly revised our forecasts upwards for 2009 anticipating that value of industry to be BGN4.5bn (US$3.3bn).

As a result of dwindling external credit lines, shrinking export markets, widespread deleveraging and the gradual consolidation of corporate and household balance sheets, economic growth will continue to slow for the remainder of 2009, with a -3.1% real growth rate expected for this year, down from an estimated 5.8% in 2008.