Report Summary

Bulgaria is one of the poorest countries in Europe. The only significant security threats it faces come from organised crime, which is pervasive, and corruption. Although Bulgaria is a recently admitted member of NATO, the country is not strategically significant in any of the regional tensions or issues. It does however lie on the transshipment route for drugs coming out of the Central Asia region and the Caucasus.

Bulgaria is therefore significant in the associated crime, human-trafficking and money laundering operations that surround the international drug trade.

During the Cold War, Bulgaria was a member of the Warsaw Pact. It maintained a large, mostly conscript, army and benefited from having a defence industry that earned several hundred million dollars annually from sales to other Warsaw Pact countries. (This was a significant amount, given the small size of Bulgaria’s economy). Up to 90% of military production was exported.

The demands placed on the military as a NATO member are very different. The need now is for a much smaller and much more professional force capable of operating in peacekeeping and humanitarian roles.

The need to inter-operate with other NATO forces means that the Ministry of Defence is working to standardise and codify its military products to comply with NATO standards.

The Bulgarian defence industry recently stated that Bulgaria is regaining its position in the international arms markets. Deputy economy and energy minister, Yavor Koyumdjiev, has stated that last year Bulgaria exported ‘special production’ valued at EUR180mn. ‘The country has retained positions in its traditional markets in Northern Africa and Europe, and has also succeeded in placing products in the USA as well,’ according to the Deputy Minister.

BMI believes that the Bulgarian government's attempts to shore up public support through a planned social aid payment to pensioners and poor households will be insufficient to win over the electorate ahead of the 2009 parliamentary election. Indeed, on the back of its failure to eradicate corruption and improve standards of living, we do not expect the Socialist-led coalition government to survive the election in its present form, with the Citizens for European Development of Bulgaria (GERB) party likely to be the main partner in the next coalition government.

Aside from concerns over economic growth and standards of living, we believe that the lack of progress in eradicating corruption will remain top of the list of the government's perceived policy failures. Having made little progress in cleaning up the judiciary or cracking down on organised crime, with a high-profile conviction remaining elusive, the European Commission suspended several hundred million euros in EU subsidies following the release of its scathing report on July 23 2008. The highly publicised report has not only strained relations between Bulgaria and the EU, but has also further weighed on the popularity of the BSP among the electorate. While the existence of endemic corruption was the central tenet of the report, the Commission did note the encouraging developments that have occurred since Bulgaria joined the EU on January 1 2007. The establishment of a State Agency for National Security, charged with fighting corruption and organised crime, was praised, as was the appointment of a new deputy prime minister to oversee the collection and distribution of EU funds.

Despite Bulgaria's solid rate of economic expansion during H108, we are still convinced that growth will slow significantly through the remainder of 2008 and that risks of a hard landing will continue to build.

Indeed, we believe that the potential for foreign capital inflows to dry up and lay bare Bulgaria's substantial external exposure, or for an emerging Europe-wide banking-sector crisis to unfold, would precipitate a rapid unwinding of the country's substantial economic asymmetries.