Bulgaria attracts more FDI in Real Estate

January 4, 2008

Every day ex-communist Bulgaria proudly announces yet another foreign investment project for a new shopping mall, a golf course or a residential complex.

The real estate boom has created new jobs and the government boasts an economic growth of 6 percent a year. But investing in construction alone cannot bring long-term prosperity to the poorest European Union member.

Bulgaria’s problems, analysts say, include underinvestment in infrastructure and manufacturing, a large grey economy, eroding education, growing consumer indebtedness, crippling inflation and a ballooning current account deficit at a time of global credit jitters.

They say the Balkan country faces troubled times ahead if it does not move quickly to address the looming economic risks.

“We are seeing building of shopping malls and investment in real estate but not in product-generating sectors that can boost potential for the future. That is certainly a problem,” said Ivailo Vesselinov, senior economist at Dresdner Kleinwort. The European Bank for Reconstruction and Development (EBRD) said the investment pattern was worrying and Bulgaria was likely to feel a negative impact in the medium term.

“There should be more efforts in dealing with issues like human capital, education, the brain drain,” EBRD’s economist Fabrizio Coricelli said. Out of a total of 4.36 billion euros in foreign direct investment attracted last year, nearly 3.2 billion went into real estate and construction, financial services and trade. Manufacturing received just 804 million euros.

The World Bank warned recently that Bulgaria would never reach EU income levels if its labour productivity continues to rise by only 2 percent a year.

The share of services — banking, trade and real estate in particular — now makes over half of the country’s annual economic output, while industry’s share stays roughly unchanged at around 30 percent and agriculture has shrunk threefold.

With global borrowing conditions getting tighter, analysts expect the fast pace of property price growth in post-communist Europe — at an average annual of 20 percent — to slow down and investment to moderate.

A decline in foreign capital flows would hurt Bulgaria, which relies entirely on foreign direct investment to cover a yawning current account gap of over 20 percent of GDP this year, driven by surging imports.

“The credit crisis will not end tomorrow…over the years there will be a negative impact on Bulgaria,” said Daniel Gros of the Brussels-based Centre for European Policy Studies.

Another headache is racing inflation, which hit an annual 12.6 percent in November. Analysts warn that without some slowdown in explosive consumer lending and demand, Bulgaria’s emerging economy faces a serious risk of overheating.

Bulgarians readily run up debt in their zeal to buy flat screen TVs, new cars and houses after decades of communist austerity.

Inflation adjusted lending rates are negative or close to zero, which draws queues for more loans. Credits have jumped 60 percent by October, while deposits rose 30 percent.

The central bank, worried by the credit boom, urged banks earlier this month to raise lending rates and tighten rules in line with the international situation. It said it was ready to intervene with fresh measures to cool down the trend.

And while a financial crisis like the 1996/97 one that wiped out a third of Bulgaria’s banks is unlikely, the country could feel the pinch if western banks, which control most of the local sector, tighten funding for their arms, analysts said.

The Socialist-led government has repeatedly pledged to keep its prudent fiscal policy and run a budget surplus of over 3 percent of GDP next year to counter external risks.

But analysts say it remains to be seen whether the ruling coalition, whose popularity is waning, will not succumb to growing public pressure for higher wages.

The government’s main tool to steer the economy is fiscal policy as Bulgaria operates under a currency board regime, which limits monetary policy and fixes the lev currency to the euro. reuters

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