31.05.2017

Bulgaria Seeks Political Backing to Lock It on Road to Euro
By Elizabeth Konstantinova and Slav Okov (Bloomberg)

A decade after joining the European Union, Bulgaria is stepping up its lobbying efforts to switch to the euro, part of an expansion by the bloc that could help stabilize the volatile Balkan region. The former communist country will ask euro-area politicians to back its bid to join the ERM-2 exchange-rate mechanism, the precursor to adopting the common currency, Finance Minister Vladislav Goranov said in an interview. EU enlargement into the western Balkans would benefit everyone by calming ethnic tensions and stemming westward migration, he said Monday. "I trust euro-area expansion is also a political process," Goranov, 40, said in his office in Sofia, the capital. "Europe must be bigger and more united to stay competitive, to overcome global challenges coming from Asia, Russia, Latin America. Integration should continue at a quick pace."

The Black Sea nation of 7 million people is pushing its bid to bind itself to the euro region at a time when the wider EU is still reeling from shocks including the Greek debt crisis, a surge in refugees and, most recently, Brexit. Five of the currency union's existing members are from the former Eastern Bloc. The Balkan region endured a spate of bloody conflicts following the breakup of Yugoslavia. Bulgaria already meets most EU requirements for joining ERM-2. Public debt is 27 percent of gross domestic product, well within the bloc's 60 percent limit, while a projected 2017 budget deficit of 1.4 percent of GDP is less than the half the 3 percent maximum.

Currency Board

Bulgaria's currency, the lev, is pegged to the euro under a currency board system imposed 20 years ago in the wake of a banking crisis. Under the system, central bank lending is banned and lev in circulation must be fully covered by foreign-exchange reserves. While the economy is expanding and the government may raise this year's growth forecast to 3.9 percent from 3 percent, Goranov frets that living standards haven't improved sufficiently to meet EU requirements and could derail the country's ERM-2 aspirations.

Prime Minister Boyko Borissov's third government in eight years took office this month, pledging to end political upheaval that's brought a spate of elections and held back investment. Priorities include reforming the judiciary and overhauling the education system. The country, which relies on low taxes and cheap production costs to retain manufacturers, remains the bloc's poorest.

"Bulgaria is one of the few countries that's persistently sought to join the single currency," Goranov said. "The country meets the formal criteria, with the exception of the cohesion indicator. Unfortunately we're far below the 70 percent of GDP per capita relative to the euro-area average that other countries had at the time of joining the single currency." The government will nevertheless lobby euro-region officials for permission to begin the euro-accession process, according to Goranov, who's serving a second stint as finance minister under Borissov. It hasn't set a time frame for its ERM-2 application and "will apply when we know we're ready and won't be rejected," he said.

Brexit, Budget

The country has ample fiscal reserves, and doesn't need to borrow abroad this and probably next year, Goranov said. The government's plan to raise pensions and wages in 2017, under pressure from the junior coalition partner, won't be a burden on the budget as there's a scope to improve revenue collection and probably narrow the budget gap, Goranov said. Government may raise this year's economic growth forecast to 3.9% from 3% after seeing 2Q data; growth driven by public and private consumption. Budget deficit may narrow to less than 1.4%/GDP target this year on improved revenue collection.

The U.K.'s departure from the EU won't directly affect Bulgaria's bilateral trade as it's in small volumes, but will probably have an impact on subsidies, Goranov said. "Brexit poses a challenge to the EU's cohesion policy," Goranov said. "It's unlikely that the net donors will raise their contribution to keep unchanged the level of subsidies to the poorer countries. Nevertheless, Bulgaria will insist on keeping the aid portfolio unchanged. The fewer economic disparities there are on the continent, the better for all."

Belene

Bulgaria is looking for private investor to omplete abandoned nuclear plant project "without any state uarantees, guaranteed power purchases or power prices," Finance inister Vladislav Goranov says. "There's preliminary investor interest," he says, declining to elaborate "If the project is viable as a private investment, it will be ompleted. If not, we'll seek other options, which may include sing the reactors to increase Kozloduy's capacity".

Government not interested in buying back CEZ assets n Bulgaria.

Banks "passed stress tests extremely well" and pose no risk to еconomy; NPLs are declining."I expect banks to be more active," Goranov said. "There's potential for credit growth, but it should be linked with growth of economic activity and entrepreneurship. It shouldn't be cause for a real-estate bubble."