Bulgaria’s economy in 2013: Treading water

In a year that saw three governments in office in Sofia, Bulgaria’s economy did as well as could have been expected, given the lack of political certainty at home and the still sluggish economic recovery in the European Union.

The economic growth target, set by the Boiko Borissov government at 1.9 per cent, was slashed by the caretaker government to one per cent scarcely two months after Borissov left office – the new target was later confirmed in the summer by the socialist government. Data through three quarters of the year showed that this target too may prove overly ambitious.

Similar target downgrades came from the World Bank, the International Monetary Fund and the European Commission – the EC went as low as 0.5 per cent growth in its autumn economic forecast, but set its sights for 2014 on 1.5 per cent growth (still more conservative than the Government’s target of 1.8 per cent).

The shallow economic recovery, marked by weak lending by banks, constrained investment growth and high unemployment, coupled with the uncertain political environment, prompted credit ratings agency Standard&Poor’s to downgrade Bulgaria’s outlook to negative in December, saying there was a one-in-three chance that it would cut Bulgaria’s rating, currently at BBB, within the next two years.

The silver lining on the grey clouds still looming over Bulgaria’s economy is that after a marked drop in employment over the past four years, the situation in the labour market seems to be stabilising in 2013. The downside of that, however, is that labour market improvement tends to lag behind economic growth, so any recovery of economic activity is expected to translate only gradually into job creation, according to EC estimates.

At least inflation has remained low, but that had much to do with development in the energy sector – without a doubt, the one sector of economic activity that has grabbed the largest share of attention in 2013.

Following large-scale protests prompted by high electricity bills in January 2013, Bulgaria’s governments cut electricity prices three times in 2013, with the last one technically counting as of January 1 2014.

These cuts effectively wiped out the 13 per cent hike approved by the regulator in July 2012, but while they kept inflation low in 2013, their sustainability even in the short term has been already questioned. The cost of the cuts has been borne thus far mostly by the private electricity distribution firms and renewable energy producers, who claim that the changes endanger their very business models.

The other major headline-grabbing development in the energy sector throughout the year was the South Stream gas pipeline, championed by Moscow as a replacement for the Ukrainian transit route – which, some analysts said, would both punish a recalcitrant Kyiv and increase the reliance of South-Eastern European countries on Russian gas.

Due to be completed by the end of 2015, very little actual construction work has yet to done on it, although “first-welding” ceremonies have now been held both in Bulgaria and Serbia, but with Gazprom cancelling the tender to pick a construction contractor in Bulgaria and for the undersea stretch, questions remain whether it will be completed as scheduled, despite Gazprom’s reassurances.

Throwing additional doubt over South Stream’s future, the European Commission said late in 2013 that the pipeline could be built, but would not be allowed to operate unless it conformed to EU’s Third energy package regulations, which require third-party access and ban Gazprom from owning the pipeline (never mind also setting the transit fees).

Russia maintains that the intergovernmental agreements it signed with several countries (including EU member states Bulgaria, Croatia, Hungary and Slovenia) are above EU law. The issue will likely be discussed throughout the coming year, with the EU member states mandating European energy commissioner Guenther Oettinger to negotiate a resolution.

Another European commissioner that Gazprom will likely hear from in the coming year is Joaquin Almunia, responsible for competition policy, on the issue of the ongoing EU investigation into allegations that Gazprom used its dominant market position to keep other companies out of a number of Eastern European markets, Bulgaria among them. The investigation was opened in 2012 and is yet to reach a conclusion, with Gazprom facing a fine of billions of euro if it is found guilty of the charges levied against it.

While Bulgaria can do little to influence the investigation – and has decided to avoid a clash with Moscow on the South Stream issue by passing the hot potato to Brussels – both of those issues (and the possible continuation of the electricity prices saga) will likely ensure that the energy sector will once again make headlines in 2014 as it did in 2013.

(Photo: Zsuzsanna Kilian/sxc.hu) 

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Alex Bivol

Alex Bivol is the Deputy Editor-in-Chief of The Sofia Globe.