BULGARIAN ECONOMY: STORM CLOUDS DARKEN

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000324 SIPDIS PASS TO EUR/NCE E.O. 12958: DECL: 06/26/2019 TAGS: EFIN ECON PGOV EINV BU SUBJECT: BULGARIAN ECONOMY: STORM CLOUDS DARKEN Classified By: AMBASSADOR NANCY MCELDOWNEY FOR REASONS 1.4 (B) AND(D). ¶1. (C) SUMMARY: The government will barely get past the July 5 general elections before a gathering economic storm erupts. EU, IMF, WB, and think tank forecasts are turning uniformly negative, with economic contraction now expected to range between 7 and 10 percent. Foreign Direct Investment has dropped over 50 percent and the World Bank assesses that Bulgaria's foreign currency reserves are insufficient to cover its short term debt. Many companies in the industrial sector are struggling to survive, and the government is providing lifeline programs to help companies retain employees on at least a part-time basis. The euro-pegged currency board that built its success on prudent fiscal policies has now reemerged as an Achilles' heel for the cash-strapped economy. The government is reluctantly revising its optimistic election rhetoric to align with the all-to-obvious reality. A new IMF program, officially brushed off by the government, has been embraced by the opposition, and some officials tell us privately that if the government survives it will seek an IMF agreement immediately after the elections. END SUMMARY. EMPLOYMENT DROPPING -------------- ¶2. (C) After seven years of growth, averaging over 5 per cent annually, the Bulgarian economy contracted by 3.5 percent in the first quarter of 2009. Industry received the worst blow, declining 20 percent year-on-year in April, especially the chemical/fertilizer and metal industries, construction and furniture, textile, and machinery-building. Cash-strapped employers are resorting to lay-offs to stay afloat, resulting in general unemployment of 7.1 percent in May. To stem the rise of unemployment figures, the Ministry of Labor and Social Policy extended a program to large scale companies, giving compensation for every worker retained on a part-time basis. Many more employers are applying for the program. Labor and Social Policy Minister Maslarova also announced that private sector employers had reduced an additional 42,000 jobs from full-time to part-time. DARK CLOUDS GATHER -------------- ¶3. (SBU) The Financial Times, IMF, EBRD, World Bank and a number of think tanks have come out with (or privately signaled) gloomy forecasts. According to the Economist Intelligence Unit (EIU),real GDP growth is expected to contract by 3.8 percent in 2009, and rebound modestly 0.9 percent in 2010. The IMF and EBRD both predict a two-year recession, with growth shrinking by 3.5 percent this year and another 1 percent in 2010. Some private analysts are even more psessmistic, projecting contractions as high as 7-10 percent. ¶4. The government has finally abandoned its previous optimistic rhetoric. Finance Minister Oresharski has publicly agreed with IMF and EC reports on Bulgaria. Both have predicted a notable decline of the local economy in 2009 by 3.5 and 1.6 percent, respectively. Against this gloomy picture, the biggest trade union, the Confederation of Independent Syndicates in Bulgaria (CISB) held a protest rally early June, demanding more safety net measures against eroding household incomes. GOB STREAMLINES EXPENDITURES -------------- ¶5. (C) Despite declining popularity, PM Sergey Stanishev backed out of initial plans to raise public servants' wages as of July, stating the need to further streamline budget expenditures. In April, government cut by half its budget target for this year, but over-optimistically stayed on the high side, projecting a budget surplus of 1.5 percent of GDP. Both IMF and EC countered those projections, with IMF estimating a moderate 0.5 percent surplus, while EC suggested the budget will dip into a deficit of 0.5 percent of GDP this year. The trend lines suggest the government will be hard pressed to keep it even within that range. Many analysts are calling for severe budget squeezes, with outlays preserved only for those ministries providing basic social services. Finding budget savings in bloated and inefficient (and corrupt) ministries will be a budget necessity but political test. NEW IMF PROGRAM IMMINENT -------------- ¶5. (C) Sustained deficit spending could compromise the Currency Board, which pegs the local currency, leva, to the euro. The Board has contributed to stable economic growth SOFIA 00000324 002 OF 002 since it was formed in 1997, as well as helping to build a solid level of international reserves (over USD 16 Billion in mid-June). A recent WB report put Latvia, Belarus and Bulgaria in the same category in terms of lacking enough international reserves to cover short-term debt. The report estimated Bulgaria's short-term debt at 100 percent of its international reserves, and may require outside capital injections if the debt rolls out. Simeon Diankov, a senior World Bank economist and policy adviser to front-running opposition party GERB, said his party is already working on a new IMF program to be ready to submit as soon as possible after the election. GERB leader Sofia Mayor Borissov publicly stated Bulgaria needs international assistance to bring it out of recession. ¶6. (C) COMMENT: Privately, government officials acknowledge the need for the IMF program but dare not say it publicly before the election. The storm will hit later this summer, or early fall, just as the political parties will be struggling to establish a coalition government. END COMMENT. McEldowney