BULGARIAN ECONOMY WORSENS; IMF PROGRAM

C O N F I D E N T I A L SOFIA 000292

SIPDIS

E.O. 12958: DECL: 06/10/2019
TAGS: ECON PREL PGOV BU
SUBJECT: BULGARIAN ECONOMY WORSENS; IMF PROGRAM
INCREASINGLY LIKELY AFTER JULY ELECTIONS

Classified By: DCM Alex Karagiannis for reasons 1.4 (b) and (d)


1. (C) Summary: With spending up, revenues down, and the
economy officially in recession, the Bulgarian Government's
handling of its finances is increasingly in question.
Running on its up-to-now steady handling of economic issues
in the midst of global financial turmoil, the Socialist-led
coalition has been unwilling to acknowledge the government's
deteriorating balance sheet ahead of July 5 national
elections. Opposition parties, joined privately by some
inside the ruling coalition, say an IMF program is
inevitable. All agree an overture to the IMF will be put off
until after the election. The poll-leading GERB party says it
will approach the IMF immediately if elected. End Summary.


2. (C) After posting its second consecutive GDP drop in the
first quarter of 2009, the Bulgarian economy is officially in
recession, according to a June 10 National Statistics
Institute anncouncement. The news came as no surprise to
anyone here as negative economic news is as ubiquitous as the
campaign posters lining Sofia's pot-holed streets. Buffered
by a policy of fiscal discipline resulting in impressive
budget surpluses and five years of record growth, the
Bulgarian economy has until recently been spared the worst of
the global financial crisis. All that has changed in the
run-up to July 5 national elections. Spending is up by 20
percent over the same period in 2008. Revenues, particularly
VAT collections, are down significantly, putting Bulgaria in
deficit territory for the first time in years. Economists
worry that this trend, combined with falling FDI and investor
nervousness over devaluation rumors in Latvia, may put
pressure on the Bulgarian lev's peg to the Euro and threaten
the currency board itself.


3. (C) The ruling coalition-leading Socialists, running on
their previous reputation as an economic steady hand, have so
far denied the problem, instead touting numbers showing
Bulgaria's impressive cumulative growth since they took
office in 2005. Privately, financial gurus within the
Bulgarian Socialist Party and coalition partner NMS say the
2009 budget will have to be revised immediately after the
elections. The budget already includes an anti-crisis
measure that withholds ten percent of all allocations to each
ministry. Our contacts tell us a further ten percent may
have to be held back to avoid a deficit.


4. (C) Deputy Minister of Finance Dimiter Ivanovski went
further, telling us privately June 9 that an IMF program is
needed as soon as possible in order to avoid a crisis of
confidence. The leading opposition party GERB agrees.
Simeon Dyankov, until two weeks ago a World Bank economist
and now GERB's economic team leader, told us June 10 that
GERB has a letter waiting to go to the IMF immediately after
elections. Saying the time had passed for a flexible IMF
agreement, Bulgaria will have to pursue an arrangement that
would include conditionality. It will be painful, he said,
but preserving the currency board and the currency peg will
be impossible without it. Finance Minister Oresharski
adamantly opposes an IMF deal before the elections; reading
between his lines, we believe he is setting the groundwork
for a stand-by arrangement, post-election. The pain levels,
even for Bulgarians long accustomed to tough times before
this seven year run, will be intense.


5. (C) Comment: With voter surveys indicating that up to
eight parties could enter Parliament, with no dominant force
emerging, it is increasingly likely that Bulgaria will face a
long, messy government formation process just as the economy
enters a meltdown. No matter what government emerges, agenda
item one will be getting the fiscal house in order. Average
Bulgarians, who have become accustomed to economic stability
and growth in return for relatively low levels of government
spending, may question the additional sacrifices they'll be
asked to make -- a recipe for public dissatisfaction and
government instability.

McEldowney