COMMISSION STAFF WORKING DOCUMENT In-depth review for BULGARIA in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: Bulgaria, competitiveness, economic growth, economic recession, economic reform, educational reform, indebtedness, labour market, macroeconomics, public debt, trade balance

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 114 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for BULGARIA 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 123 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

   EN 

 
 
 
 
 
  
 
 
 
 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY AND CONCLUSIONS ................................................................. 3 

1. INTRODUCTION.................................................................................................................. 5 

2. MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES .......................... 5 

2.1. External indebtedness.......................................................................................................... 5 

2.2. Private sector indebtedness ............................................................................................... 11 

2.3. Financial sector ................................................................................................................. 14 

2.4. Unit labour costs................................................................................................................ 15 

2.5. External competitiveness................................................................................................... 15 

2.6. Real-estate market ............................................................................................................. 19 

3. IN-DEPTH ANALYSIS OF SELECTED TOPICS............................................................. 21 

3.1. External indebtedness........................................................................................................ 21 

3.2. Corporate sector indebtedness........................................................................................... 26 

3.3. Labour market challenges ................................................................................................. 31 

4. POLICY CHALLENGES .................................................................................................... 40 

2 

 
 
 
 
 
 
 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS  

In  May  2012,  the  Commission  concluded  that  Bulgaria  was  experiencing  macroeconomic 
imbalances, in particular as regards developments related to external indebtedness, corporate 
sector deleveraging and the labour market adjustment process. In the Alert Mechanism Report 
(AMR)  published  on  28  November  2012,  the  Commission  found  it  useful,  also  taking  into 
account  the  identification  of  an  imbalance  in  May,  to  examine  further  the  persistence  of 
imbalances or their unwinding. To this end, this In-Depth Review (IDR) takes a broad view of 
the Bulgarian economy  in line  with  the scope of the surveillance under the Macroeconomic 
Imbalance Procedure (MIP). The main observations and findings from this analysis are: 

•  Bulgaria's  external  position  remains  highly  negative,  although  recent 
developments go in the right direction. The external indebtedness imbalance seems 
to  be  unwinding  since  2010.  Debt  repayments  and  nominal  economic  growth  have 
reduced indebtedness as a share of GDP.  Expectations of future economic growth and 
current  account  developments  suggest  a  gradual  improvement  of  the  country's  net 
international investment position.  

•  The current account adjustment has been driven by export market share gains, 
but  risks  remain.  The  current  account  has  remained  broadly  balanced  over  the  last 
three years. The excessive deficits observed during the economic boom years are not 
expected to return to the same extent as the economy recovers. The excessive current 
account  deficits  in  the  pre-crisis  years  were  facilitated  by  ample  capital  inflows  that 
were often linked to foreign investment in real estate. A replication of such a growth 
pattern in the future would lead to renewed pressure on the current account. While a 
repeat of this scenario cannot be excluded, the probability seems low. 

•  Notwithstanding  export  market  share  gains,  concerns  over  losses  in  cost-
competitiveness  remain.  Bulgaria's  external  competitiveness  was  supported  by  the 
sustained gains in export market shares, except over the 2009-2010 crisis period. Non-
cost factors, including quality improvements made by export-oriented industries, have 
been identified as the main contributor to market share gains. Nevertheless, unit labour 
cost  (ULC)  growth,  while  having  come  down,  remains  one  of  the  fastest  in  the  EU. 
This is likely to weigh on competitiveness, thus compromising export performance.  

•  While the private sector is clearly deleveraging, corporate debt remains very high 
and  still  a  cause  for  concern.  Debt  of  non-financial  corporations  has  been  reduced 
over  2010-2011  but  remains  very  high  as  a  share  of  GDP.  In  addition,  a  significant 
build-up  of  other  accounts  payable  (not  part  of  the  debt  definition),  such  as  trade 
credit,  rent  and  arrears  on  the  payment  for  goods  and  services,  poses  a  threat  to  the 
overall  development  of  the  non-financial  corporate  sector.  Continuously  rising  non-
performing  loans  of  corporates  also  testify  to  the  on-going  difficulties  faced  by  the 
private sector.  

•  Financial sector stability has been preserved, but profitability remains very low 
and very weak credit growth may adversely affect growth and future output. The 
banking  sector  has  proved  resilient  to  the  deterioration  in  the  economic  situation 
following the global economic crisis. Banking sector stability is supported by prudent 
impairment provisioning, reflecting strict supervisory standards, and sufficient capital 
buffers.  High  provisioning  has,  however,  depressed  banking-sector  profitability  and 
very  low  credit  demand  has  left  banks  with  excess  liquidity  on  their  balance  sheets. 

3 

 
 
Credit  growth  is  unlikely  to  resume  soon,  given  the  still  highly-leveraged  private 
sector.  Depressed  domestic  credit  growth  risks  compromising  near-term  growth 
prospects. 

•  The labour market has been hit disproportionately hard by the crisis. In response 
to  the  economic  downturn,  companies  overwhelmingly  opted  for  shedding  labour 
rather  than  reducing  wages.  This  caused  Bulgaria  to  experience  one  of  the  largest 
drops in employment in the EU. The unemployment rate reached 12% in 2012 and the 
share  of  inactive  population  has  increased.  Unemployment  is  concentrated  in 
vulnerable  groups  like  the  low-skilled  and  the  young  and  the  share  of  long-term 
unemployed has increased. 

•  Skills  mismatches  and  labour  supply  shortages  in  some  sectors  are  impeding 
economic  growth.  A  concerted  effort,  including  labour  market  and  regional  policy 
measures as well as educational reform, is needed to alleviate the situation. Moreover, 
the  continued  increases  in  sectoral  and  occupational  minimum  social-security 
thresholds  aimed  at  reducing  the  share  of  grey  economy  and  raising  government 
revenue have some adverse side-effects on certain segments of the labour market. As 
those  thresholds  are  set  very  close  to  the average  wage  for  certain  occupations,  they 
might  inadvertently  price  out  workers  in  some  low-skilled  occupations  and  less 
developed  regions.  Additionally,  they  impose  a  higher  effective  social  tax  rate  for 
those employees whose wage is below the threshold.   

The IDR also discusses the policy challenges stemming from these developments and possible 
policy responses. A number of elements can be considered:  

•  Concerning Bulgaria's high external indebtedness, efforts aimed at attracting capital in 
productive sectors and improved EU funds absorption are among possible measures to 
improve growth prospects and address the challenge of achieving a sustainable level of 
external indebtedness.  

•  Concerning the challenge of reducing non-financial corporate sector indebtedness, late 
payments and the uncertainty thereby created among economic agents may need to be 
examined more closely. Streamlining the business insolvency framework through in- 
and  out-of-court  settlement  procedures  and  improving  the  efficiency  of  the  judiciary 
can reduce existing risks and deleveraging pressures.  

•  The strong adverse effects from the crisis are still felt in Bulgaria's labour market, as 
evidenced  by  the  rising  unemployment  and  job  losses,  especially  in  the  low-skilled 
segment.  Furthermore,  skills  mismatches  appear  to  have  led  to  labour  shortages  in 
some sectors, thus confirming the increasingly structural nature of the unemployment 
in the country. A comprehensive package of measures could be discussed to tackle this 
significant challenge that threatens to impede future economic growth.  

4 

 
 
1. INTRODUCTION 

On  28  November  2012,  the  European  Commission  presented  its  second  Alert  Mechanism 
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on 
the  prevention  and  correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial 
screening device helping to identify Member States that warrant further in depth analysis to 
determine  whether  imbalances  exist  or  risk  emerging.  According  to  Article  5  of  Regulation 
No  1176/2011,  these  country-specific  “in-depth  reviews”  (IDR)  should  examine  the  nature, 
origin and severity of macroeconomic developments in the Member  State concerned, which 
constitute,  or  could  lead  to,  imbalances.  On  the  basis  of  this  analysis,  the  Commission  will 
establish  whether  it  considers  that  an  imbalance  exists  and  what  type  of  follow-up  it  will 
recommend to the Council. 

This  is  the  second  IDR  for  Bulgaria.  The previous  IDR,  published  on  30  May  2012  led  the 
Commission  to  conclude  that  Bulgaria  was  experiencing  macroeconomic  imbalances,  in 
particular  as  regards  developments  related  to  external  indebtedness,  corporate  sector 
deleveraging and the labour market adjustment process. Overall, in the AMR the Commission 
found it useful, also taking into account the identification of an imbalance in May, to examine 
further the persistence of imbalances or their unwinding. To this end this IDR takes a broad 
view  of  the  Bulgarian  economy  in  line  with  the  scope  of  the  surveillance  under  the 
Macroeconomic Imbalance Procedure (MIP). 

Against  this  background,  Section  2  of  this  in-depth  review  looks  more  in  detail  into  these 
developments  covering  both  the  external  and  internal  dimensions,  followed  by  a  specific 
focus on external indebtedness, private sector debt and labour market challenges in Section 3. 
Section 4 discusses policy considerations. 

2. MACROECONOMIC SITUATION AND POTENTIAL IMBALANCES 

Both internal and external imbalances had built up in the Bulgarian economy in the pre-
crisis  period,  especially  during  the  economic  boom  from  2006-2008  when  GDP  growth 
averaged  6.5%  in  a  catching-up  context.  Bulgaria's  EU  accession  in  2007  contributed  to 
positive confidence developments and an exceptionally strong flow of foreign investment in 
the economy. The capital inflows were mirrored by a dramatic rise in external indebtedness, 
private  sector  credit  and  a  soaring  current  account  deficit.  Private  sector  indebtedness 
increased  rapidly  to  levels  above  the  indicative  scoreboard  threshold,  mainly  explained  by 
increases in corporate debt, while household debt remains limited. Rising budget revenues led 
to surpluses, allowing the build-up of a fiscal buffer and keeping public debt at a low level at 
the same time. As a reflection of economic and labour market overheating during 2007-2008, 
private consumption, inflation, real estate prices and construction also soared. The tight labour 
market  drove  exceptionally  rapid  growth  in  wages,  starting  from  a  low  level  and  leading  to 
strong rises in unit labour costs (ULC).  

The  imbalances  have  been  unwinding  during  and  after  the  global  economic  crisis.  The 
Bulgarian  economy  was  strongly  affected  by  the  crisis  in  2008/09.  The  recovery  has  been 
slow,  reflecting  not  only  global  economic  headwinds,  but  also  the  deleveraging  process 
following a markedly strong economic boom and a sudden stop of capital inflows. External 
indebtedness has been reduced mainly due to private sector debt repayments and the growth 
in  nominal  GDP  after  the  crisis.  The  current  account  deficit  has  corrected  swiftly  and  has 
remained  broadly  balanced  over  2010-2012.  The  improvement  has  not  come  only  from 
reduced  imports,  as  capital  inflows  have  practically  halted,  but  also  from  a  strong  export 

5 

 
 
 
performance.  Both  external  indebtedness  and  private  sector  debt  indicators  have  registered 
stable  improvements.  The  adjustment  on  the  labour  market  has  taken  place  through  strong 
cuts in employment but at the same time continued growth in average wages, implying that 
certain segments of the labour market were hit more severely than others, possibly pointing to 
some  structural  issues.  ULC  growth  has  slowed  considerably  in  the  economic  adjustment 
phase and does not appear harmful to external competitiveness at the moment; nevertheless, 
future wage growth should be supported by labour productivity gains. Rising unemployment 
remains  a  concern  and  points  to  structural  problems  that  pose  a  serious  risk  of  locking  the 
economy on a low growth path. 

The identified macroeconomic imbalances are likely to persist over the forecast period. 
On  the  external  side,  indebtedness  is  expected  to  increase  slightly.  The  current  account  is 
expected to register a deficit of 2% of GDP by the end of 2014, with net borrowing at 0.4% of 
GDP. The trade balance is seen to remain negative based on expected higher imports growth. 
Some  external  competitiveness  concerns  remain  as  unit  labour  cost  growth  is  forecast  to 
continue  relatively  rapidly.  Unemployment  should  stabilise  at  the  current  high  level  and 
measures to reduce it should be the focus of policymakers. Corporate debt is seen to continue 
to  weigh  on  credit  growth  and  ultimately  on  economic  output,  as  some  sectors  are  still 
recovering from the crisis.  

2.1. External indebtedness 

The  net  international  investment  position  (NIIP)  remains  strongly  negative  but  has 
improved  over  2010-2011.  A  large  build-up  of  foreign-owned  assets  in  the  country,  which 
started in 2005 and was especially strong over 2006-2008, is reflected in a strongly negative 
NIIP and a high foreign debt stock1 (see Graphs 1 and 4). However, the NIIP has improved by 
12%  in  nominal  terms  between  the  peak  in  2009Q2  and  2012Q2.  As  a  percentage  of  GDP, 
there is an improvement from -102% of GDP in 2009 to -86% in 2011 due to a combination 
of the nominal growth effect, the repayment flow and valuation changes. 

Graph 1: International investment 
position, stocks 

Graph 2: International investment position, 
flows (including valuation effects) 

100

50

0

-50

P
D
G

f
o
%

-100

-150

30

20

10

0

-10

-20

-30

-40

06Q1

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
Net portfolio investment
Changes in reserves (net)
Other investment (net)
Net direct investment
Net financial derivatives
Net external debt (neg. sign)
Net int'l investment position (NIIP)
Marketable debt (portfolio debt instr. and other investment, net)

07Q1

11Q1

10Q1

08Q1

09Q1
Valuation changes
Net transaction effect (rest FA bal.)
Investment income effect
Nominal growth effect
Change in NIIP (y-o-y)

12Q1

1 Both the NIIP and the foreign debt stock describe external indebtedness but from different conceptual 
viewpoints. 

6 

 
 
 
 
 
 
 
 
 
                                                            
Source: Commission services 

The deleveraging is largely explained by decreasing net external debt (NED) – that part 
of external liabilities that requires the payment of principal and interest (see Graph 1). NED 
has been reduced by almost 25% in nominal terms and by 15 pps. as a share of GDP between 
2008 and 2011. The country's large FDI stock has proven more resilient and remained largely 
intact. 

The  reduction  of  net  indebtedness  comes  from  both  financial  institutions  and  the  non-
financial private sector. The banking sector has managed to both reduce external liabilities 
and  increase  its  foreign  assets,  while  the  rest  of  the  private  sector  benefits  mostly  from  a 
continued increase in assets from a very low base. In the meantime, the government’s prudent 
fiscal  policy  throughout  the  crisis  has  kept  government  debt  low.  Central  bank  reserves 
remained mostly stable, although somewhat lower than their 2008 peak. 

Graph 3: International investment position, by sector 

P
D
G

f

o
%

,
s
e
i
t
i
l
i

b
a

i
l

&
s
t
e
s
s
A

100

50

0

-50

-100

-150

-200

05Q4

06Q4

07Q4

08Q4

09Q4

10Q4

11Q4

Assets, Central Bank (incl reserves)

Liabilities, Central Bank (incl reserves)

Assets, General Government

Liabilities, General Government

Assets, MFI (excl central bank)

Liabilities, MFI (excl central bank)

Assets, Private sector

Liabilities, Private sector

Net int'l investment position (NIIP)

Source: Commission services 

The  NIIP  continued  to  improve  in  2012,  albeit  at  a  slower  pace,  but  will  certainly 
continue  to  exceed  the  indicative  scoreboard  threshold  (-35%)  over  the  coming  years. 
The  future  evolution  of  the  NIIP  will  depend  on  the  strength  and  composition  of  economic 
growth.  Stronger  growth  would  allow  the  country  to  grow  out  of  its  external  indebtedness. 
The composition  of growth also matters. During the boom years, growth was  dominated  by 
domestic demand and Bulgaria was running large current account (CA) deficits that increased 
the economy's dependence on foreign financing. A similar future growth pattern would once 
again negatively affect the country's external position. Keeping in mind that the indicator is a 
stock  variable,  it  is  likely  to  remain  beyond  the  indicative  threshold  for  years  to  come.  The 
development of NIIP is discussed in more detail later on. 

A significant part of Bulgaria's external indebtedness stems from FDI, also in the form 
of  foreign  intercompany  lending,2  i.e.  sources  that  are  less  dependent  on  financial 
market conditions and risks. The net FDI stock accounted for close to 86% of GDP at the 
end  of  2011,  substantially  higher  than  in  other  new  Member  States  (see  Graph  5).  Cross-

2 Intercompany foreign lending is statistically part of FDI. 

7 

 
 
 
 
 
 
 
 
                                                            
border intercompany lending stands at around 40% of GDP, among the highest levels in the 
EU.  Nominal  gross  external  debt  has  decreased  since  the  end  of  2008  largely  due  to 
decreasing short-term debt of the banking sector. The trend is due to the shift of funding of 
financial institutions towards the domestic market.  

Bulgaria's large FDI stock decreases the risk of 'hot money' capital outflows, associated 
with  portfolio  investment  and  third-party  loans.  Most  of  the  country's  external  liabilities 
have been accumulated during the boom years through parent-company equity investment and 
lending. During the crisis, this has reduced spill-over effects to the financial sector and helped 
preserve  its  resilience  (Lisicky  and  Maleček,  2012).  Given  the  composition  of  investor 
countries, it is likely that part of FDI has in fact a domestic origin but is channelled through 
foreign  companies  for  administrative  or  financial  reasons,  further  reducing  the  country's 
genuinely external exposure. 

Graph 4: Foreign debt structure 

P
D
G

f
o
%

120

100

80

60

40

20

0

05Q3

06Q4

08Q1

09Q2

10Q3

11Q4

Government long term
Other Sectors long term
Banks long term (incl. CB)
Intercompany lending

Source: World Bank 

Government short term
Other Sectors short term
Banks short term (incl. CB)

Graph 5: Net FDI stocks, comparison with selected Member States 

100

90

80

70

60

50

40

30

20

10

0

P
D
G
%

2001

2000
          Bulgaria
          Hungary
          Poland

2002

2003

2004

2005

2006

2007

2008

          Czech Republic
          Latvia
          Slovakia

2011

2010
2009
          Estonia
          Lithuania
          Slovenia

Source: United Nations 

8 

 
 
 
 
 
 
 
FDI inflows seem to have stabilized at a low level. The foreign direct investment inflows 
have been pro-cyclical and peaked at around 29% of GDP in 2007, but dried up considerably 
during the global economic crisis. In both 2010 and 2011, the inflow amounted to some 5% of 
GDP, with even lower results expected for 2012. Most FDI inflows come from EU Member 
States.  However  a  slight  shift  is  observed  in  2012,  when  Russia  and  Switzerland  also  had 
significant  contributions.  The  largest  outflows  were  towards  Germany  and  Greece,  mainly 
linked to the energy sector and loan repayments to parent companies. 

The  current  account  has  stabilised  following  the  large  swings  over  the  past  decade. 
Bulgaria  ran  moderate  current  account  (CA)  deficits  prior  to  2005,  reflecting  a  typical 
economic  catching-up  process  requiring  a  higher  investment  rate  financed  through  capital 
inflows.  The  sharp  deterioration  in  the  balance  over  2005-2009  moved  it  well-beyond  the 
scoreboard threshold (-4% of GDP). Following a swift improvement of the trade balance and 
increasing current transfer inflows, the CA adjusted quickly and remained broadly balanced 
over  the  2010-2012  period  (see  Graph  6).  The  earlier  deficit  was  largely  financed  by 
exceptionally strong FDI inflows that follow closely the trade deficit in goods. In 2007-2008, 
other  capital  inflows  (mainly  foreign  lending)  also  contributed  strongly  to  the  deficit, 
indicating possible speculative (portfolio  and real estate) investment showing up in  an asset 
price  bubble.  The  crisis  rapidly  corrected  the  deficit,  with  adjustment  coming  from  both 
reduced  imports  and  sustained  growth  in  exports.  The  value  of  exports  increased  by  about 
27%  from  2008  to  2012,  although  it  partly  also  reflects  favourable  global  price  trends  for 
Bulgaria's commodity-rich exports. Bulgaria has overall shown strong gains in global export 
market shares. 

Graph 6: Current account composition  Graph 7: Current account financing 

30

20

10

0

-10

-20

-30

-40

-50

P
D
G

f
o
%

20

10

0

-10

P
D
G

f
o
%

-20

-30

-40

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Capital account (KA)
Current transfers
Income balance
  Trade balance - services
  Trade balance - goods
Trade balance
Current account balance (CA)
Net lending/borrowing (CA+KA)

Source: Commission services 

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Net errors and omissions
Official reserves (net)
Other investment (net)
Portfolio investment (net)
Direct investment (net)
Current account balance
Net lending/borrowing (CA+KA)

If  sustained,  the  currently  stable  CA  balance  would  continue  to  reduce  foreign 
indebtedness. A balanced or slightly negative current account, which is expected to persist in 
the  coming  years  according  to  the  Commission's  winter  2013  forecast  extending  to  2014, 
appears sufficient for a gradual reduction in external indebtedness as a share of GDP, given 
the medium- to long-run growth prospects of the Bulgarian economy. Also, updated estimates 

9 

 
 
 
 
 
  
 
 
 
suggest  that  the  Bulgarian  REER  is  currently  not  overvalued.3  Future  deleveraging  is 
discussed in more detail in Section 3.1. 

The  current  account  adjustment  has  been  very  steep  as  the  facilitating  capital  flows 
dried up. It seems that the very substantial foreign capital inflows into Bulgaria up to 2008 
not  only  financed  the  large  and  growing  current  account  deficits,  but  were  actually  driving 
them to a large extent. The current account deficit peaked during exceptional economic times, 
characterised  by  a  booming  world  economy  and  financial  market  deepening  together  with 
positive  confidence  effects  following  Bulgarian  EU  accession  in  2007  and  an  abundance  of 
profitable investment opportunities and incentives for consumption smoothing in a catching-
up  economy.  The  current  economic  context  is  characterised  by  higher  degrees  of  risk 
perception and risk aversion. This is likely to lead to more cautious investment decisions and 
related modest capital inflows. Thus, the current account adjustment appears to have been of a 
structural nature, following a one-off large influx  of  foreign  investment  linked  to  Bulgaria's 
integration in world markets, which was halted abruptly by the financial crisis. 

The cyclical component in the adjustment might become more apparent with economic 
recovery. Once the economy returns to its normal catching-up dynamic, the current account 
gap is likely to open up again but to remain below the exceptional levels observed over 2005-
2008  (see  Graph  8).  A  good  understanding  of  the  drivers  of  the  deficit  is  important  to 
determine  the  best  policy  response.  During  the  boom  years,  the  current  account  appears  to 
have  had  a  strong  link  with  the  real-estate  sector,  which  has  been  volatile.  For  the 
convergence  process  to  continue,  foreign  capital  inflows  should  largely  be  in  capital  goods 
and  productive  FDI  in  order  to  boost  future  GDP  growth  and  export  capacity.  A  massive 
return  of  real-estate  related  investments,  which  were  an  important  driver  of  capital  inflows 
and credit growth  during the boom,  would be a cause for concern. A future recovery in the 
labour market could give a boost to domestic demand, thereby putting further pressure on the 
current account through increased imports. Renewed increases in unit labour costs, resulting 
from  a  tightened  labour  market,  could  weigh  on  the  country's  export  performance,  thus 
increasing the cyclical component of current account adjustment. 

Graph 8: Current account and output gap 

% GDP

6

0

-6

-12

-18

% 
6

0

-6

-12

-18

00

02

04

06

08

10

12

Current account balance (lhs)

Output gap (rhs)

Source: Commission services 

3  The  concept  of  a  fundamental  equilibrium  exchange  rate  describes  the  exchange  rate  that  would  prevail  if  a 
country's  business-cycle-adjusted  current  account  balance  were  to  match  its  'current  account  norm',  i.e.  the 
'average'  current  account  balance  that  would  prevail  in  a  country  with  similar  structural  characteristics. 
Deviations from the current account norm may be translated into the deviation of the REER from its equilibrium 
via  empirically-derived  semi-elasticities.  REER  overvaluation  thus  describes  the  extent  to  which  the  REER 
would have to depreciate for the current account balance to reach its corresponding current account norm. For 
details on the methodology, see Salto and Turrini (2010). 

10 

 
 
 
                                                            
2.2. Private sector indebtedness 

Following a large accumulation of liabilities before the crisis hit, the private sector has 
been  deleveraging  over  the  last  couple  of  years.  During  the  boom  years,  the  Bulgarian 
private sector accumulated significant liabilities, exceeding the levels in all EU-104 Member 
States,  except  Hungary.  Debt  as  a  share  of  GDP  peaked  in  2009  for  both  households  and 
corporates but has since been trending downwards largely on account of nominal growth and 
some  repayments.  The  government  has  served  as  a  stabilizer  for  the  economy,  running 
surpluses  during  the  boom  and  modest  deficits  during  the  crisis.  Private  sector  debt  is 
concentrated in the non-financial corporate sector, while household debt is relatively low. 

Household indebtedness is at the second-lowest level in the EU, at 25.5% of GDP in 2011 
and  down  from  28.7%  in  2009.  Nevertheless,  households  contributed  to  the  increase  in 
private sector indebtedness over 2001-2009 by some 22 pps. Credit growth has been slightly 
negative  since  then,  with  a  declining  stock  of  consumer  loans  and  decelerating  growth  in 
mortgages. Given the low debt level, the interest burden on the household budget is below the 
EU average. Over time, the interest burden may increase as households' propensity to take on 
more debt increases with economic recovery and income convergence. However, at present, 
the risk of overleveraging does not appear significant. 

Graph 9: Credit growth 

Graph 10: Credit stocks 

50

40

30

20

10

0

-10

-20

P
D
G

f

o
%

P
D
G

f
o
%

200

180

160

140

120

100

80

60

40

20

0

01

02

03

04

05

06

07

08

09

10

11

00 01 02 03 04 05 06 07 08 09 10 11

Financial corporations
Household
Private sector EU27
Private sector

Source: Commission services 

Government
Non financial corporations
MIP Threshold

Financial corporations
Household
Private sector EU27
Private sector

Government
Non financial corporations
MIP Threshold

The  corporate  sector  remains  highly  indebted.  Similar  to  the  developments  in  Bulgaria's 
external position, non-financial corporations (NFC) are deleveraging from a high debt stock 
and  the  process  will  take  some  time.  Nevertheless,  as  shown  in  Graphs  9  and  10,  recent 
developments  indicate  that  a  deleveraging  process  is  under  way.  The  corporate  debt  stock 
amounted to 120.5% of GDP in 2011, which is a markedly high level compared to other EU-
10 countries. At the same time, the financial sector appears little indebted on aggregate (15% 
of GDP) and the government sector's conservative fiscal policy has kept public debt at a low 
level (17% of GDP). 

4  EU-10  countries  comprise  Bulgaria,  the  Czech  Republic,  Estonia,  Hungary,  Latvia,  Lithuania,  Poland, 
Romania, the Slovak Republic and Slovenia. 

11 

 
 
 
 
 
 
 
 
 
 
                                                            
Graph 11: Debt of non-financial corporations, by maturity 

140

120

100

80

60

40

20

0

P
D
G

f
o
%

00

01

02

03

04

05

06

07

08

09

10

11

EU-10 short-term avg EU-10 long-term avg BG short-term BG long-term

Source: Eurostat 

Foreign long-term debt dominates the corporate leverage structure. The bulk of financing 
comes  from  abroad  and  is  almost  equally  distributed  between  intercompany  and  third-party 
debt. Domestic corporate indebtedness amounts to around 38% of the total stock. Short-term 
debt levels are somewhat higher than those for the EU-10 peers and could be a cause for some 
liquidity concerns (see Graph 11). However, the main difference in indebtedness comes from 
long-term  obligations  to  parent  companies. The  NFC  interest  burden  remains  above  the  EU 
average (see Graph 12). 

Graph 12: Interest burden of corporates and households 

I

D
G
d
n
a

d
e
d
d
a

e
u
a
v

l

f
o
%

12

10

8

6

4

2

0

05

06

07

08

09

10

11

Interest payments / gross disposable income, Households
Interest payments / gross disposable income, Households, EU27
Interest payments / value added, Non-fin. Corporations
Interest payments / value added, Non-fin. Corporations, EU27

Source: Commission services 

The recent sharp drop in corporate debt is unlikely to continue.  Private sector debt has 
decreased from a peak of 175% of GDP in 2009 to 146% in 2011. While dropping below the 
scoreboard  threshold,  it  is  still  a  rather  high  number  given  Bulgaria's  relatively  low  income 
levels.  A  major  correction  took  place  in  2011,  when  private  sector  debt  declined  by  around 
25%  of  GDP.  Some  8-9  pps.  of  this  decline  can  be  attributed  to  repayments,  while  7  pps. 

12 

 
 
 
 
 
 
 
 
 
 
 
resulted  from  nominal  growth  (denominator  effect).  The  remainder  came  from  a 
methodological reclassification of some short-term trade credits, which were listed as short-
term debt in previous years, to the other payables account. Given the nature of the correction, 
balance sheet adjustments in the coming years are likely to be smaller. The net assets of the 
sector are highly negative, which may imply deleveraging pressures (see Graph 13). 

Graph 13: Net assets by sector 

P
D
G

f
o
%

150

100

50

0

-50

-100

-150

-200

-250

00

01

02

03

04

05

06

07

08

09

10

11

Financial corporations
Households
Private sector EU27
Source: Commission services 

Government
Non financial corporations
Private sector

The high value of net assets as a share of GDP is partly due to the large overall size of the 
corporate sector balance sheet compared to the country's GDP. In order to better understand 
its link to indebtedness, the dynamics of the corporate financial account are explored in more 
detail in Section 3.2. 

In  the  coming  years,  private  debt  developments  will  depend  on  nominal  GDP  growth 
and  corporate  financing  sources.  Moderate  nominal  GDP  growth  is  forecast  to  continue, 
according to the Commission services' Winter 2013 Forecast extending until 2014 This would 
help the country to grow out of its debt stock. Credit growth of NFC has picked up somewhat 
in  2011-2012  but  remains  subdued  (see  Graph  14).  The  high  level  of  indebtedness  and  the 
continuously  rising  non-performing  loans  ratio  suggest  that  corporates  may  need  to  explore 
other sources of financing for investment and future growth. 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Graph 14: Credit growth  

%
90

70

50

30

10

-10

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Loans to households for consumption and other purposes (y-o-y % change)

Loans to households for housing (y-o-y % change)

Loans to households, total (y-o-y % change)

Loans to non-financial corporations (y-o-y % change)

Source: Commission calculations based on Bulgarian National Bank (BNB) data 

2.3. Financial sector 

Despite  the  negative  impact  of  elevated  private  sector  indebtedness  on  the  quality  of 
banks'  assets,  the  Bulgarian  banking  sector  remains  resilient.  Following  a  relative 
slowdown in the increase of non-performing loans in late 2011, the growth of loans that are 
more than 90 days past-due accelerated again in the first half of 2012. Thus, the stock of non-
performing loans reached 16.6% of the total loans at the end of 2012. While this number may 
appear high compared to peer countries, it should be interpreted in the appropriate domestic 
context.  On  top  of  Bulgarian  banks'  conservative  impairment  policy  in  line  with  IFRS 
requirements,  the  supervisor  is  imposing  further  specific  regulatory  provisions.  As  a  result, 
impairments  of  more  than  60%  of  the  gross amount of  non-performing loans  are taken as a 
charge against the regulatory capital account. Furthermore, it is to be noted that, even in the 
context of this relatively high coverage ratio, banks' overall capital adequacy remains above 
international averages, at 16.7% at the end of 2012, with a core tier 1 ratio of 15.2%. Finally, 
the loss-absorption capacity of Bulgarian banks' own funds remains very high. In fact, most of 
the own funds are in the form of equity, as evidenced by the system's average core tier 1 ratio 
of 15.2% in mid-2012. 

In  parallel  with  its  comfortable  capital  position,  the  Bulgarian  banking  system  is  also 
benefitting from positive liquidity inflows. In 2012, resident deposits grew by 9.4% in the 
context of an almost stagnating credit growth of under 3%. On the one hand, these numbers 
reflect  the  conservative  stance  of  households  and  the  lack  of  more  profitable  investment 
alternatives. On the other hand, slow credit growth indicates that overleveraged corporates are 
not  taking  on  additional  debt.  This  has  resulted  in  the  accumulation  of  extra  liquidity  as 
attested  by  a  declining  loan-to-deposit  ratio  and  increased  investments  in  government 
securities.  The  latter  has  been  the  most-dynamically  growing  asset  class  on  banks'  balance 
sheets. The extra liquidity in the system has also resulted in a continued decline in the inter-
bank market rates. 

14 

 
 
 
 
Overall, macro-financial stability in Bulgaria has been preserved since the onset of the 
crisis.  Banks  managed  to  maintain  their  capital  buffers  and  to  remain  profitable  despite 
significant  loan-loss  impairments,  while  their  liquidity  position  has  even  improved.  Most 
importantly,  the  financial  sector  stayed  stable  without  recourse  to  public  money  or  state 
guarantees.  As  a  result,  the  stability  of  the  banking  sector  has  supported  the  sound 
management of public finances. 

Close  monitoring  of  balance  sheet  developments  should  continue  with  a  view  to  pre-
emptively assessing solvency and liquidity risks. The evolution of non-performing loans, as 
well  as  banks'  strategies  for  dealing  with  them,  needs  to  be  followed  closely.  For  now, 
commercial  banks  have,  for  the  most  part,  opted  to  keep  collateral  from  bad  loans  on  their 
balance  sheets.  On  the  corporate-loans  side,  banks  are  working  closely  with  firms  to  help 
them  restructure  debt  so  as  to  retain  them  as  clients  going  forward.  On  the  household  side, 
some non-performing consumer loans have been sold, whereas collateral on mortgage loans 
remains  on  the  banks'  balance  sheets  due  to  unfavourable  housing  prices.  Thus,  the  future 
development of real estate prices would have an impact on balance sheets through collateral 
valuation  and  impairment  provisions.  A  continued  decrease  in  housing  prices  should  be 
reflected  in  collateral  valuations  and  adequate  additional  charges  taken  from  banks'  capital 
buffers. 

Table 1: Macro-financial stability of the Bulgarian banking system 

Total assets of the banking sector (% of GDP)

Share of assets of the five largest banks (% of total assets)

Foreign ow nership of banking system (% of total assets)

Financial soundness indicators:
              - non-performing loans (% of total loans) 1)

              - capital adequacy ratio (%) 2)

              - return on equity (%) 1), 3)

Bank loans to the private sector (y-o-y % change)

Lending for house purchase (y-o-y % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries beneficiary of official financial assistance  (% of 
GDP)

Private debt (% of GDP)

Gross external debt (% of GDP) 
            - Public

            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default sw ap spreads for sovereign securities (5-year)*

Notes: 

1) 2008-2009 figures include foreign bank branches.

2) The capital adequacy ratio is defined as total capital devided by risk w eigthed assets. 

3) Net income to equity ratio. After extraordinary items and taxes. Tier 1 capital.

* Measured in basis points.

2007

101.4

56.7

81.6

2.1

13.8

24.8

64.5

62.9

2008

103.9

57.3

83.4

2.5

14.9

23.1

32.4

38.1

2009

108.8

58.3

83.7

6.4

17.0

10.2

4.1

8.6

2010

111.2

55.2

…

11.9

17.5

7.9

1.6

3.7

2011

109.7

52.6

…

14.9

17.5

7.1

3.8

1.3

2012

114.1

…

…

16.6

16.7

…

4.3

0.1

105.6

128.1

126.7

119.5

107.5

104.1

0.0

…

…

10.1

65.8

32.3

…

0.0

…

72.6

7.1

72.1

139.3

498.6

0.0

…

76.2

8.1

76.6

399.3

353.1

0.0

…

74.6

7.9

75.4

326.2

259.0

0.0

…

71.9

7.2

69.8

274.8

276.0

0.0

…

…

7.1

71.1

300.3

253.8

Source: Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), Commission 
services (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

2.4. Unit labour costs 

Following a period of particularly rapid growth over 2007-2009, the moderation in ULC 
growth  has  continued  during  2012,  bringing  the  scoreboard  indicator  below  the 
threshold. However, ULC growth is still higher than in most other European economies. The 
2007-2009  period  was  an  exceptional  one,  marked  by  economic  and  labour  market 
overheating and a sudden drop in output in 2009. In 2000-2006 and in the economic recovery 
phase during 2010-2012, the rise in ULC was somewhat more moderate. Nevertheless, in the 

15 

 
 
 
 
absence of reforms, ULC growth (driven by wage pressures and economic convergence) may 
become  excessive  again  in  the  medium  term  when  the  economy  picks  up  and  the  labour 
market  tightens.  However,  in  the  shorter  term  (2013-2014),  according  to  the  most  recent 
Commission services' forecast, the rate of change of the ULC is predicted to remain below the 
scoreboard threshold. 

ULC growth is mirrored in REER trends, similarly showing stabilisation after a marked 
deterioration  over  2007-2009.  Nevertheless,  over  a  longer  historical  period  from  2005  to 
2012,  Bulgaria  appears  to  have  lost  wage  cost  competitiveness  relatively  rapidly  compared 
with  the  other  EU-10  Member  States.  While  the  standard  cost-related  indicators  (ULC  and 
REER) show one of the steepest deteriorations in competitiveness in the EU, a solid rise in 
global market shares suggest that non-cost factors (product quality, marketing efficiency, etc.) 
could have mitigated these adverse ULC trends. 

Graph 15: Decomposition of ULC 

Graph 16: REER (ULC-deflated) 

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f

o
e

t

a
R

20

15

10

5

0

-5

-10

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Inflation (GDP deflator) Compensation per Employee
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in 36 industrial competitors of Bulgaria

Source: Commission services 

180

160

140

120

100

80

60

40

0
0
1
=
5
0
0
2
x
e
d
n

i

00

02

04

06

08

10

12

14

Bulgaria
Estonia
Latvia
Poland

Czech Republic
Hungary
Lithuania
Slovakia

The decomposition of ULC reveals that the indicator is driven by wage growth, which 
has  consistently  outpaced  productivity  growth.  Important  questions  also  relate  to  the 
overall  labour  market  adjustment  over  the  crisis,  with  wages  rising  strongly  even  with  a 
marked decline in employment and rising unemployment. These issues are analysed in more 
detail in Section 3.3. 

2.5. External competitiveness 

The  tradable  sector  has  remained  competitive  since  the  crisis  and  exports  have 
contributed strongly to the correction of the current account balance. In comparison with 
EU-10  peers,  cumulative  gains  in  world  export  market  shares  have  been  strong  with  both 
goods and services contributing positively in 2011, whereas services were the main driver in 
previous  years.  The  largest  gains  were  realised  in  tourism  on  the  services  side  and  in  basic 
metals,  mineral  products,  electrical  machinery  and  agricultural  products  on  the  goods  side 
(see Graphs 19 and 20). Bulgaria's export specialisation in global markets appears to be tilted 
towards raw materials (basic metals, minerals, petroleum products, wood, and agriculture) and 
basic low-value-added goods (clothing, tobacco products). A gradual shift away from textiles 
and towards machinery and minerals export can be observed over the last decade (see Graphs 

16 

 
 
 
 
 
 
 
 
 
 
 
17 and 18). The rising market share in tourism can be explained by the increased number of 
tourist accommodations that became available as a result of the real estate boom. 

Graph 17: Structure of Bulgarian exports 

Miscellaneous

Transportation

Machinery / Electrical

Metals

Stone / Glass

Footwear / Headgear

Textiles

Wood & Wood Products

Skins, Leather, & Furs

Plastics / Rubbers

Chemicals & Allied Industries

Mineral Products

Foodstuffs

Vegetable Products

Animal & Animal Products

0

10

20

Graph 18: Comparative advantage by 
sector 

Total goods
Miscellaneous
Transportation
Machinery / Electrical
Metals
Stone / Glass
Footwear / Headgear
Textiles
Wood & Wood Products

Raw Hides, Skins, Leather, &…

Plastics / Rubbers
Chemicals & Allied Industries
Mineral Products
Foodstuffs
Vegetable Products
Animal & Animal Products

Avg 2009-2010

Avg 2000-2001

as % of total exports

-1.0

-0.5

0.0

0.5

1.0

Trade in goods: Symmetric Revealed Comparative 
Advantage Index

2000-2001

2009-2010

Source: Commission services 

Bulgaria's sustained gains in export market shares can be explained by improving non-
cost competitiveness. Non-cost factors allow for a reconciliation of the apparent loss of cost 
competitiveness,  evidenced  through  rising  ULC  and  appreciating  ULC-deflated  REER,  and 
the growth in export market shares observed in the last ten years. A recent study shows that 
Bulgarian  exports  benefited  from  significant  quality  improvements  (both  physical  and 
branding/marketing ones that increase the consumers' valuation of a product) over 1999-2011 
(Benkovskis  and  Wörz,  2012).  The  contribution  of  those  non-price  changes  outweighs  the 
losses  in  cost-competitiveness,  partially  stemming  from  the  convergence  process,  thereby 
allowing  the  country  to  gain  market  shares.  Deepening  of  economic  integration  and  FDI 
inflows are among the possible explanations for the quality changes observed. 

Quality  improvements  have  been  observed  for  all  of  the  country's  largest  export 
industries. Another study looks at the contribution of quality (allowing exporters to charge a 
higher price) and other non-cost factors (allowing exporters to sell higher volumes for a given 
price)  to  external  competitiveness  (Di  Comite,  2012).  The  conclusion  for  Bulgaria  is  that, 
once again, quality improvements contribute positively over 1999-2011, while other non-cost 
factors and ULC have only a negligible influence during this period. The paper also presents 
results  by  product  category.  Among  Bulgaria's  main  export  industries,  the  largest  gains  in 
quality  were  achieved  for  mineral  fuels,  plastics  and  machinery.  The  mix  of  companies 
operating  in  those  sectors,  including  a  large  oil  refinery,  a  few  foreign  ones  and  several 
domestic ones, suggests that the gains realised should be sustainable in the future.  

Some  other  factors  that  could  explain  the  apparently  favourable  external  competitiveness 
position in spite of steady rises in nominal ULC include: 

1.  Labour  costs  in  the  manufacturing  sector  have  grown  more  moderately  than  the 
national aggregate and also compared to a peer group of new Member States. As shown 
in Graph 21,  the nominal ULC in manufacturing, which is a good proxy  for  tradable goods 
and the export sector, has remained nearly flat over the past decade, in contrast to the index 
for the overall economy. 

17 

 
 
 
 
2. External competitiveness is boosted by the lowest level of wages and non-wage costs in 
the  EU.  The  average  wage  amounted  to  about  350  euros  per  month  in  2011.  The  hourly 
labour  cost  in  Bulgaria  was  still  just  EUR  3.5,  15%  of  the  EU  average  of  EUR  23.1  and 
compared  with  EUR  4.2  in  Romania.  In  purchasing  power  standards,  wages  in  Bulgaria 
amount to about 37% of the EU average, on par with Romania (for a more detailed study of 
wages  and  wage  formation  see  Section  3.3.).  While  at  first  sight  this  might  seem  to  be  a 
strong competitiveness situation, productivity is also the lowest in the EU, with nominal GDP 
per head at 20% of the EU average, or 45% when adjusted for purchasing power standards. 
Looking forward, wage levels will most likely converge gradually towards the EU average as 
productivity  levels  also  converge.  Various  business  surveys  show  that  the  current  average 
wage level is not the main concern for enterprises in the present economic circumstances. 

Graph 19: Market shares in services 

Graph 20: Market shares by product 
categories 

Other
services

Travel

Transport
ation

Services

Total goods
Miscellaneous
Transportation
Machinery / electrical
Metals
Stone / glass
Footwear / headgear
Textiles
Wood and wood products

Raw hides, skins,…
Plastics / rubbers
Chemicals and allied…
Mineral products
Foodstuffs
Vegetable products
Animal and animal…

0.0

0.1

0.2

0.3

0.4

0.5

0.0

0.2

0.4

0.6

2000-2001

2010-2011

Share in total World exports (%)

2000-2001

2009-2010

World market share (%)

Source: Commission services 

World export market shares of Bulgaria seem to have benefited recently from a windfall 
profit via the rise in world market prices for various commodities that are important for 
Bulgaria's exports. In recent years, ferrous and non-ferrous metals, plastics, rubber, fuels and 
cereals  world  prices  have  given  rise  to  a  positive  terms-of-trade  effect  (Graph  22).  In  2010 
and  2011,  export  prices  grew  by  close  to  10%  annually,  well  over  import  price  growth. 
However,  world  commodities  prices  have  proven  to  be  volatile  in  the  past.  In  fact,  export 
price growth seems to have started to decelerate strongly in the first half of 2012, more than 
import prices, contributing to the return to a current account deficit in the first half of 2012. 

18 

 
 
 
 
 
 
 
 
 
 
 
 
 
Graph 21: Nominal unit labour cost 

Graph 22: Terms of trade (four-quarter 
moving average) 

10

8

6

4

2

0

-2

-4

-6

160

140

120

0
0
1
=
5
0
0
2
x
e
d
n

I

100

80

00

02

04

06

08

10

12

Total economy

Manufaturing

Source: Eurostat, Commission services 

2.6. Real-estate market 

00

02

04

06

08

10

12

Terms of trade 4Q moving average

Bulgaria has gone through a real-estate boom-bust cycle over the past decade. Nominal 
prices  dropped  substantially  over  the  crisis,  by  about  41%  between  2008Q3  and  2012Q2. 
From 2004 to 2008, residential construction increased from about 2% of GDP to 6% of GDP 
and readjusted to about 4% of GDP in 2010, which is already slightly below the EU average. 

The  adjustment  in  the  real-estate  sector  is  continuing.  The  number  of  building  permits, 
which acts as a leading indicator, is on a downward trend and is expected to drop further in 
2012  to  around  30%  of  the  2005  level  (see  Graph  23).  Investment  volumes  were  still 
declining in 2012. 
Graph 23: Residential investment and 
building permits 

Graph 24: Structural housing features 

0
0
1
=
5
0
0
2

250

200

150

100

50

0

99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Building Permits (2005=100)

Residential Investment (% of GDP, right axis)

Source: Commission services 

P
D
G

f
o
%

7

6

5

4

3

2

1

0

)

%

(
n
o
i
t
a
u
p
o
p

l

f
o
e
r
a
h
S

19 

Bulgaria

EA17

EU27

100

90

80

70

60

50

40

30

20

10

0

Tenant

Owner

Low inc.

High inc.

Housing cost overburden rate 

Owner occupancy rate 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The  inflow  of  foreign  capital,  one  of  the  main  drivers  of  the  real-estate  boom  is 
subsiding.  As  of  2012Q2,  real  estate  accounts  for  about  21.5%  of  the  gross  FDI  stock,  the 
largest  among  all  industries.  While  the  share  of  real-estate-related  FDI  inflow  was  notably 
large in 2006-2008, since then it has declined in line  with all foreign investments. The FDI 
inflow  in  real  estate  even  turned  negative  in  20105,  while  returning  to  a  modest  positive 
growth in 2011. Downward valuation effects from falling housing prices could drive the share 
of real estate  down (see  detailed discussion below). Recent data do not suggest that foreign 
investors are returning to buy second residences or to invest in the tourism sector.  

Graph 25: House prices and MFI loans for house purchase 

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f

o
e
t
a
R

250

200

150

100

0
0
1
=
5
0
0
2

50

0

05Q1

07Q1

09Q1

11Q1

MFI loans for house purchase (% GDP, yoy)
Real House Price Index (2005=100), right axis
Nominal House Price Index (2005=100), right axis

Source: Commission services 

Household indebtedness related to the real-estate sector has remained largely in check. 
Mortgages have decreased as a share of GDP since the beginning of 2011 (see Graph 25). The 
outstanding mortgage debt even decreased slightly in 2012, indicating weak demand. In part, 
this is due to country- and culture-specific factors – above 80% of the people already own at 
least  one  home  and  ownership  rates  significantly  exceed  the  EU  average  for  both  the  low-
income  and  high-income  households  (see  Graph  24).  Securing  housing  is  traditionally 
perceived  as  important  and  a  lot  of  affordable  accommodation  was  made  available  to 
households during the socialist regime. 

Rent levels appear high compared to disposable income. This is to be expected given the 
low  income  level  and  rising  real  housing  prices,  which  tripled  between  2003  and  2008.  An 
increase in supply coming from completed projects purchased speculatively, as witnessed by 
the  high  FDI  inflow,  could  help  reduce  rents  in  certain  sectors  of  the  market  (like  holiday 
accommodations) but should play a lesser role in residential renting.  

5 Negative FDI inflow in an economic sector means that the amount of foreign capital leaving the country in a 
given year is larger than the foreign capital coming in.  

20 

 
 
 
 
 
 
 
 
 
                                                            
3. IN-DEPTH ANALYSIS OF SELECTED TOPICS 

3.1. External indebtedness 

This section examines two features of Bulgaria's external indebtedness – its vulnerability and 
sustainability.  The  vulnerability  is  analysed  using  the  composition  of  the  NIIP,  foreign 
exchange risk, debt maturity, currency and geographical structure. The sustainability analysis 
is based on the debt stock level, recent and projected capital flows and the expected economic 
performance.  Finally,  the  structure  of  foreign  direct  investments  is  described,  together  with 
possible valuation effects and their impact on different industries. 

Vulnerability of the external position 

The  composition  of  Bulgaria's  external  indebtedness  does  not  imply  significant 
vulnerability  concerns.  As  a  converging  economy,  Bulgaria  has  a  small  amount  of  assets 
abroad and its NIIP is very close to the stock of domestic assets held by foreigners. Thus, any 
shocks  to  the  economy  would  have  a  much  stronger  impact  on  the  country's  external 
liabilities. An examination of the structure of the country's gross external debt provides more 
insights into the vulnerability of the external position. Foreign exchange risk is relatively low 
as 89% of the gross external debt is denominated in euro . Given the currency-board regime in 
the  country,  the  Bulgarian  lev,  which  is  pegged  to  the  euro,  is  stable  and  supported  by 
sufficient currency reserves. The arrangement is supported by the public at large, so political 
risk  is  also  low.  Foreign-exchange  risk  could  be  further  decreased  if  the  large  US  dollar-
denominated bond issue maturing in 2015 is refinanced in euro as envisaged in the country's 
latest  national  reform  programme  (National  Reform  Programme,  2012).  Short-term  debt, 
which  reflects  the  exposure  to  short-term  refinancing  needs,  is  26%  of  the  total.  More  than 
half  the  debt  is  attributable  to  non-financial  corporations,  while  the  financial  sector  has 
significantly  reduced  its  short-term  foreign  liabilities  and  replaced  them  by  attracting 
domestic deposits, mainly from households. The geographical structure of the debt shows that 
it  is  concentrated  in  the  country's  main  trading  partners  –  the  EU  Member  States  and 
international institutions hold over 75% of the gross debt. Thus, a weak EU economy is likely 
to weigh on Bulgarian exports and decrease the availability of foreign funding to the country.  

Sustainability of the NIIP 

Flow  data  show  that  three  components  are  driving  the  NIIP  correction  –  nominal 
growth,  net  transactions  and  valuation  changes.  Repayments  (net  transactions)  turned 
positive in Q4 2010 but have played a more significant role since Q2 2011. Deleveraging is 
moderate but sustained, pointing to a possibly prolonged, but smooth, adjustment. Valuation 
changes have contributed to reduce Bulgaria's NIIP since Q4 2009, being the main driver of 
deleveraging in 2010. The process eased somewhat in 2011 but seems to have picked up again 
in 2012 (see Graph 2). Given the sluggish economic growth projected for the coming years, 
further reductions of the NIIP as a share of GDP are unlikely to come from the denominator. 
Thus, debt repayments and valuation changes are likely to have a larger impact on the overall 
ratio. 

Bulgaria's external position appears sustainable, although further deleveraging may be 
a  difficult  and  protracted  process.  External  positions  and  the  related  transactions  are 
unsustainable if they require an expected large future adjustment of the CA balance. A large 
negative  NIIP,  as  is  the  case  of  Bulgaria,  means  that  large  payment  outflows  are  needed  to 
service  the  liabilities.  This  negative  investment  income  transfers  domestic  wealth  to 
foreigners, creating a wedge between GDP and GNI, and could weigh on domestic demand in 

21 

 
 
 
 
the future.6 The country's income balance contributed negatively to the CA balance in 1995-
2000, and again since 2006, by an average of 4.4% of GDP over the last six years. Current 
transfers  from  an  increasing  number  of  citizens  working  abroad,  linked  to  the  opening  of 
European  labour  markets,  seem  to  partially  offset  the  negative  income  balance.  Overall,  the 
CA balance remained stable over the last three years and no large outflows are expected in the 
coming years as evidenced by the net lending/borrowing account (see Graph 26).  

An analysis of the primary CA balance based on recent data indicates slow, but stable, 
deleveraging ahead. The net borrowing account is the part of the balance of payments that 
requires financing and, as a result, increases the nominal NIIP. Net borrowing is formed by 
the  sum  of  the  current  and  capital  account  balances.  Bulgaria  has  run  large  CA  deficits 
throughout  the  economic  boom  mainly  due  to  a  negative  trade  balance  financed  by  FDI 
inflows.  The  capital  account  on  the  other  hand,  has  contributed  positively  by  around  1%  of 
GDP  since  2008  –  a  development  that  is  linked  to  EU  funds  absorption.  The  CA  posted  a 
small surplus in 2011 but is forecast to return to negative territory in 2012 and remain there 
throughout  the  forecast  period.  The  capital  account  development  depends  largely  on  the 
country's  capacity  to  absorb  structural  EU  funding,  which  could  significantly  reduce  the 
country's financing needs. On balance, the net borrowing account is forecast to remain under 
1% of GDP in the forecast period.  

Graph 26: External financing needs 

P
D
G

f
o
%

15

10

5

0

-5

-10

-15

-20

-25

-30

95

97

99

01

03

05

07

09

11

13*

Capital account

Income balance

Current transfers

Trade balance

Current account balance (CA)

Net lending/borrowing (CA+KA)

Source: Eurostat 

Recent levels of current account balances appear consistent with a gradual improvement 
in  the  NIIP.  The  country's  primary  current  account  (trade  balance)  is  likely  to  remain 
negative  and  the  CA  gap  may  open  up  further  if  the  economic  growth  pattern  repeats  the 
boom years' scenario. Despite Bulgaria's large negative NIIP, it appears that the country can 
sustain the current level of its NIIP by running a small CA deficit. The necessary condition is 
that the non-interest part of the CA (i.e. trade balance and current transfers) is positive. For 
Bulgaria,  capital  transfers  from  EU  funds  also  contribute  positively.  The  requirements  for 
reducing the external indebtedness are reviewed below. An in-house model is used to forecast 
the  development  of  Bulgaria's  NIIP  under  different  assumptions  for  economic  growth, 

6 As witnessed for EA Member States, high negative NIIP translates into negative investment income (D'Auria et 
al., 2012). 

22 

 
 
 
 
 
                                                            
inflation, the CA balance and the external yield. The baseline scenario7 tests for sustainability 
of  the  NIIP  at  its  current  level.  In  order  to  sustain  the  2011  NIIP  value  by  the  year  2020, 
Bulgaria  could  run  an  average  annual  CA  deficit  of  3.2%,  which  translates  into  an  average 
positive non-interest CA balance of 1.3%. According to the latest forecast, the CA deficit is 
expected to average 2.1% of GDP up to 2014, resulting in a gradual improvement of the NIIP 
as a share of GDP.  
Saving and investment rates 
The  sustainability  of  the  current  saving  and  investment  rates  is  important  for  future 
growth.  Another  approach  to  assess  the  country's  external  financing  needs  is  to  look  at  the 
current  and  projected  saving  and  investment  rates.  The  current  saving  rate  has  remained  at 
historically-high  levels  over  the  last  three  years  with  increasing  contributions  coming  from 
both  corporates  and  households  (see  Graph  27).  The  sustainability  of  the  adjustment  will 
depend on whether the current saving and investment levels are compatible with investment 
needs in the future. In this respect, the magnitude of the decline in the corporate sector's gross 
capital formation (from a peak of 60% of value added in 2008 to 30% of value added in 2010) 
stands out as exceptionally strong compared to the euro-area average, but less so compared to 
some Central and Eastern European countries that also went through a rapid adjustment. The 
corporate  investment  level  still  appears  relatively  buoyant  compared  with  the  euro-area 
average of about 20% of value added in 2010 or compared with other converging Central and 
Eastern  European  economies.  This  indicates  that  the  current  investment  level  might  imply 
only moderate upward pressures in terms of economic convergence needs. The relatively low 
level  of  household  indebtedness  could  lead  to  increased  dissaving  and  re-opening  up  of  the 
saving-investment  gap  once  overall  economic  conditions  and  international  capital  markets 
normalise, allowing for stronger capital inflows to Bulgaria. 
Graph 27: Aggregate economy saving and investment rates   

33.6

28.7

27.6

28.9

25.7

22.8

23.7 23.5 23.5

23.9

22.5

20.9 20.8 21.2

21.5

20.4

20.4

18.3 18.3

19.0

15.8

14.7

12.5

17.3

15.8 16.3 15.9

14.5

14.4

8.8

P
D
G
%

35

30

25

20

15

10

5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Investment

Savings

Source: Commission services 

7 The model has been developed by the European Commission's Directorate General for Economic and Financial 
Affairs.  The  baseline  scenario  assumptions  for  GDP  growth,  inflation  and  external  yield  are  based  on  the 
Financial Sustainability Report 2012. 

23 

 
 
 
 
                                                            
FDI structure and developments 

Manufacturing  and  other  productive  sectors  seem  to  replace  real  estate  as  the  main 
driver of FDI. Out of the total foreign direct investment stock at the end of 2009, 70% was 
accounted for by the services sector, while the share of the manufacturing sector was around 
16%.  FDI  inflows  in  real  estate  and  financial  intermediation  were  especially  strong  over 
2007-2008.  In  the  subsequent  two  years,  the  trend  reversed  to  some  extent  with  increased 
inflow  in  manufacturing  and  diminishing  investments  in  construction  and  real  estate.  Four 
low-value-added and resource-intensive sectors, i.e. food products, textile, metal products and 
chemicals, account for 75% of the FDI in manufacturing. A positive trend observed recently 
is the increased investment in  higher  value-added  activities, most notably  in the automotive 
industry. 

FDI has been concentrated in the non-tradable sector but has also benefitted exporters 
through extended availability of business services. FDI was heavily concentrated in sectors 
servicing the local market. Nevertheless, it also helped strengthen the export capacity in some 
tradable  sectors,  including  mining,  minerals  and  the  metal  industries,  which  saw  significant 
FDI  inflows.  Bulgaria  has  shown  one  of  the  strongest  growth  rates  in  exports  of  goods  and 
services among the EU-10, both in nominal value and in constant price terms (see Graph 28). 
Strong  FDI  in  financial  and  other  business  services  (e.g.  advertising,  marketing),  which  are 
key  intermediary  inputs,  may  also  have  played  an  indirect  role  in  strengthening  the  export 
capacity in other sectors. 

Graph 28: Export growth compared to selected countries, fixed prices 

400

350

300

250

200

150

100

50

0

0
0
1
=
0
0
0
2

00

02

04

06

08

10

12

14

          Bulgaria
          Hungary
          Poland
          Romania

          Czech Republic
          Latvia
          Slovakia

          Estonia
          Lithuania
          Slovenia

Source: Commission services 

The  largest  FDI  stocks  in  Bulgaria  are  in  real  estate,  financial  intermediation  and 
manufacturing. From 2000 to 2006, the largest portion of FDI prior to the boom years was 
concentrated in manufacturing, transport and telecommunications. During the boom years, the 
focus shifted to real estate and financial intermediation (see Graphs 29 and 30). FDI inflows 

24 

 
 
 
 
have shrunk to under 5% of GDP in recent years (3.2% in 2010, 4.5% in 2011 and 3.5% in 
2012). Currently six sectors comprise 90% of the FDI stock in the country.  

Graph 29: FDI stock by economic sector 

100

P
D
G

f
o
%

80

60

40

20

0

03

04

05

06

07

08

09

10

11

Financial intermediation

Wholesale and retail trade

Other

Source: BNB 

Manufacturing and infrastructure

Real estate and construction

Valuation  effects  from  asset  revaluation  may  have  an  impact  on  Bulgaria's  FDI  stock. 
As explained above, a significant part of Bulgaria's external indebtedness stems from the large 
FDI stock. In addition to flow developments, it is worth investigating the composition of this 
stock and the role played by valuation effects8 in recent years. These effects have two main 
sources – changes in the currency exchange rate and changes in underlying asset prices. As 
Bulgaria operates under a currency-board regime and most FDI comes from the EU, we can 
conclude that there is no significant valuation effect from currency fluctuations. In contrast, 
asset valuations could have a significant impact on the FDI stock, especially given the large 
portion of real-estate investment in FDI. 

Graph 30: FDI inflow by economic sector 

Graph 31: FDI stock valuation effects 

30

25

20

P
D
G

15

f
o
%

10

5

0

03

04

05

06

07

08

09

10

11

Other

Real estate and construction

Wholesale and retail trade

Manufacturing and infrastructure

Financial intermediation

Source: BNB and Commission calculations 

15

10

5

0

-5

I

D
F

f
o
%

-10

-15

06

07

08

09

10

11*

 Manufacturing
 Construction
 Real estate, renting and business activities

8  Valuation  effects  are  defined  as  the  difference  between  the  annual  FDI  flow  and  the  change  in  FDI  stock 
between  the  beginning  and  the  end  of  that  year.  FDI  in  Bulgaria  (and  not  net  FDI)  is  used  to  analyse  price 
changes  of  domestic  assets.  Direct  investment  by  Bulgarians  abroad  is  small  and  valuation  effects  there  are 
negligible. 

25 

 
 
 
 
 
 
 
 
 
 
                                                            
Negative  valuation  effects9  in  real  estate  and  positive  trends  in  manufacturing  are 
observed.  FDI  stocks  have  remained  stable  and  have  slightly  increased  with  the  notable 
exception of real estate. A minor outflow in 2010 has translated into a decrease of nearly 5% 
in the stock in just one year, suggesting negative valuation effects (see Graph 31). The same 
trend is confirmed by 2011 data that show that the stock increased by less than the net inflow 
in  both  the  construction  and  the  real-estate  sectors.  In  contrast,  the  FDI  stock  in  productive 
activities, like manufacturing, experienced positive valuation effects in the 2009-2011 period. 
Larger valuation effects for all industries can be expected once the 2011 FDI data are revised 
to reflect all corporate balance sheets.10 Negative valuation effects in productive sectors could 
impair the future ability to attract fresh FDI as this would increase the country risk perception.  

3.2. Corporate sector indebtedness 

The  sectoral  balance  sheets  reveal  deleveraging  pressures 
for  non-financial 
corporations. Sectoral data reveal the contribution of institutional agents – households, non-
financial  corporation  and  government  –  to  the  country's  net  position  against  the  rest  of  the 
world.  The  analysis  of  such  data  helps  to  detect  a  possible  concentration  of  risk  in  certain 
areas  of  the  economy,  which  may  pose  a  threat  to  future  economic  growth.  As  discussed 
above, the net asset position of the non-financial private sector in Bulgaria is highly negative 
as  a  share  of  GDP.  Below  we  look  in  more  detail  into  the  causes  and  implication  of  this 
situation.  Graph  32  plots  the  net  financial  assets  of  a  country  against  the  rest  of  the  world, 
together  with  the  net  position  of  the  public  sector.  Countries,  in  which  net  assets  of 
households exceed those of non-financial corporations, are displayed in a light colour; dark is 
used  otherwise.  For  Bulgaria,  deleveraging  pressures  appear  from  the  negative  net  position 
against  the  rest  of  the  world  as  well  as  the  insufficient  coverage  of  corporate  net  assets  by 
those  of  households.  When  compared  to  EU-10  peers,  deleveraging  pressures  in  Bulgaria 
appear quite high. Hungary is in a worse position as public sector consolidation needs put an 
additional burden on the economy. Latvia is in a similar position, whereas external pressures 
in other countries are less pronounced. 

Intra-sector corporate payables increase the debt burden and increase the balance sheet 
sustainability risk of firms in the country. The private sector's net assets are highly negative 
with  large  corporate  liabilities  outweighing  the  increasingly  positive  household  net  asset 
position  and  improving  balance  of  the  financial  sector.  Focusing  on  the  non-financial 
corporations,  their  net  liabilities  exceed  180%  of  GDP  and  are  well  above  the  EU-10  peers 
(see Graph 33). The equity part of the liabilities for Bulgarian NFC is around 41% compared 
to an EU-10 average of 48% and an EU-27 average of 49% (see Graph 34). The remaining 
liabilities  are  distributed  evenly  between  loans  and  other  payables.11  On  a  non-consolidated 
basis,  the  sectoral  balance  sheet  is  much  larger  than  those  of  other  EU-10  Member  States, 
implying  both  higher  assets  and  liabilities.  On  a  consolidated  basis,  the  gap  closes 
significantly but remains one of the highest in the EU, meaning that the bulk of payables and 

9  As  we  are  looking  at  FDI  inflow  stock,  positive  valuation  effects  are  defined  as  increases  in  domestic  asset 
prices that expand the FDI stock. 
10  2011  data  will  be  revised  using  corporate  balance  sheets  data  in  March  2013.  Valuation  effects  are 
strengthened when BoP data are replaced by data from corporate financial statements. 
11 The 'other payables' account includes: 
- trade credits (relating to normal business activity that are not classified as loans as well as arrears); and  
- other accounts (rent, wages, taxes and social security payments, dividends and interest).  

26 

 
 
 
                                                            
receivables are concentrated  between  firms within the non-financial sector.12 This is not the 
case for corporate debt,13 where most of the liabilities are due to other sectors. The on-going 
accumulation  of  payables  in  the  sector,  coupled  with  the  high  level  of  corporate  loans  and 
rising  non-performing  loans,  indicates  significant  deleveraging  pressures  that  need  to  be 
addressed. 

Graph 32: Deleveraging pressures 

80

60

40

20

0

-20

-40

-60

-80

)

P
D
G

f
o
%

(

r
o
t
c
e
s

c

i
l

b
u
P
e
h
t

f
o
A
F
N

-100

-120

FI

DK

EE

SE

BG

LV

RO

SI

CZ

LT
SK

PL

HU

PT

IE

ES

CY

EL

FR

UK

AT

IT

DE

MT

BE

NL

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

Net Financial Assets to the Rest of the Worlds (% GDP)

Source: Eurostat 

The  "other  payables"  account  has  expanded  rapidly  throughout  the  crisis  pointing  to 
increased  uncertainty  and  possible  market-clearing  issues.  As  discussed  above,  a  large 
share  of  the  corporate  liabilities  come  from  intercompany  loans,  which  can  be  seen  as  less 
problematic. Among EU-10 peers, it can be observed that other payables have grown in line 
with  nominal  GDP,  which  is  to  be  expected  as  part  of  normal  business  activity  (see  Graph 
36).The other payables account of NFC in Bulgaria expanded from 80% of GDP in 2007 to 
117% in 2011, exceeding the pace of the economy. 

12  Consolidation  is  done  at  sectoral  level.  Thus,  consolidated  payables  are  due  to  the  other  sectors  of  the 
economy, including the Rest of the World account. 
13  Corporate  debt  is  defined  as  the  sum  of  loans  and  securities  other  than  shares  and  does  not  include  other 
payables. 

27 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph  33:  Net  assets  of  non-financial 
corporations, comparison 

Graph  34:  Decomposition  of  financial 
liabilities, non-financial corporations 

P
D
G

f

o
%

0

-50

-100

-150

-200

-250

P
D
G

f
o
%

500

450

400

350

300

250

200

150

100

50

0

02

04

06

08

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EU27

EU-10

Bulgaria

Equity

Other accounts payable

Loans and debt securities

Source: Eurostat 

Source: Commission services 

Graph 35: Balance sheet of non-financial corporations  

P
D
G

f
o
%

300

200

100

0

-100

-200

-300

-400

-500

00

01

02

03

04

05

06

07

08

09

10

11

A, securities OTS (F3)
A, loans (F4)
A, shares and other equity (F5)
A, insurance & TR (F6)
A, other accounts (F7)
A, currency and deposits (F2)

L, securities OTS (F3)
L, loans (F4)
L, shares and other equity (F5)
L, insurance & TR (F6)
L, other accounts (F7)
Net financial assets

Source: Commission services 

Arrears  in  the  'other  payables'  account  pose  a  sector-wide  risk.  Focusing  on  the 
breakdown of the 'other payables' account, the bulk is in the trade credits account consisting 
of payments due to suppliers, rent on buildings and arrears. No data are available on the exact 
share  of  arrears  but  the  increase  of  payables  during  the  crisis  suggests  impeded  market 
clearing. Even without arrears, the uncertainty created by the large amount of other payables 
puts  a  strain  on  the  cash  flow  and  could  impair  the  normal  operation  and  future  investment 
decisions of firms. 

28 

 
 
 
 
 
 
 
 
 
 
 
 
 
Graph 36: Non-financial corporations, 'other payables' account 

140

120

100

P
D
G

f

o
%

80

60

40

20

0

02

03

04

05

06

07

08

09

10

11

BG intra-sector

EU-10 intra-sector

BG to other sectors

EU-10 to other sectors

Source: Eurostat 

Non-performing  loans  (NPLs)  continue  to  increase  for  the  corporate  sector  as  a  whole 
but developments in different industries may vary. NPLs (91+ days overdue) reached 20% 
of  gross  loans  to  non-financial  corporations  in  2012  (see  Graph  37).  Combined  with  the 
amount  of  impaired  loans  (31-90  days  overdue),  the  ratio  reaches  25%.  Companies  in 
Bulgaria  operate  in  a  very  difficult  environment  of  slow  economic  growth  and  high 
indebtedness  within  both  the  corporate  sector  and  the  financial  sector.  On  the  part  of 
households,  decreasing  house  prices  combined  with  deteriorating  labour  market  conditions 
weigh negatively on the prospects of credit growth. NPLs for mortgages continue to increase 
and  could  harm  bank  profitability.  The  deteriorating  loans  portfolio  is  not  an  immediate 
concern  but  can  have  a  negative  impact  on  the  economy  in  the  medium  term.  Demand  for 
lending is subdued due to the sluggish economy, while banks have plenty of liquidity, since 
they are experiencing a stable inflow of domestic deposits. 

Alternative  forms  of  financing  could  assist  corporate  sector  deleveraging.  Using  own 
funds  as  well  as  attracting  more  equity  investment  can  be  beneficial  for  firms.  Sustained 
profitability  of  the  sector  suggests  availability  of  retained  earnings  and  while  the  capital 
market is still dormant, increasing assets of private pension funds in the country could provide 
fresh capital flows. Private equity and venture capital funds operating in the country can fund 
small  and  especially  start-up  businesses.  Private  debt  issues  are  another  option  that  could 
potentially  diversify  the  capital  structure  and  has  been  used  increasingly  by  other  European 
companies to compensate for the stricter bank lending (Lewandowska and Thiel, 2010). The 
last option is somewhat limited in the case of Bulgaria due to the small size of companies and 
the large fixed cost required for bond issues. Small and medium-sized enterprises have to rely 
mainly on intercompany and bank financing.  

29 

 
 
 
 
 
Graph 37: Non-performing loans by type 

n
b
N
G
B

9

6

3

0

%

20

16

12

8

4

0

11-Q1

11-Q2

11-Q3

11-Q4

12-Q1

12-Q2

12-Q3

12-Q4

Mortgage Loans (lhs)

Consumer Loans (lhs)

Corporate Loans (lhs)

Mortgage Loans NPLs ratio

Consumer Loans NPLs ratio

Corporate NPLs ratio

Source: BNB 

Even  though  bad  loans  and  payables  are  increasing,  insolvencies  seem  very  low 
compared  to  regional  peers.  According  to  a  recent  study  (Coface,  2012),  insolvency 
procedures  in  Bulgaria  are  almost  non-existent  and  contrast  sharply  with  the  experience  of 
other  countries  in  the  region  (see  Graph  38).  Given  the  high  levels  of  overall  and 
intercompany  indebtedness,  these  results  are  somewhat  surprising  and  could  point  to 
structural  barriers  that  hinder  insolvency  and  bankruptcy  procedures.  The  lack  of 
information14  about  the  future  financial  health  of  debtors  hurts  planning  and  investment 
decisions  of  the  concerned  parties.  To  resolve  the  problem,  the  authorities  could  look  into 
streamlining the debt restructuring and insolvency procedures and making court proceedings 
more  efficient.  Court  specialisation  and  out-of-court  agreement  guidelines  could  have 
beneficial effects and facilitate settlements (IMF, Article IV Staff Report, 2012).15 

Recent  legislative  changes  in  the  corporate  law  address  insolvency  and  late  payments 
issues.  In  the  last  few  months,  two  important  new  measures  have  been  discussed  by 
legislators.  Firstly,  the  insolvency  backdating  option,  allowing  companies  to  file  for 
insolvency from a historical date. Until recently, firms had the opportunity to 'backdate' their 
insolvency, leaving claims from lenders and trade partners incurred after the insolvency date 
unsatisfied, thus disadvantaging some creditors. Secondly, a 30-day deadline on the payment 
of  invoices,  for  both  company-to-government  and  company-to-company  transactions,  has 
been introduced (extended up to 60 days in some cases). Delayed payments will accumulate a 
penalty interest rate set by the regulation. 

14  Meaning  many  firms  could  be  waiting  for  receivables  from  companies  that  are  insolvent  but  are  not  in  a 
procedure or the procedure is taking too long to complete. 
15 See also a World Bank study (Garrido, 2012) and the EBRD report on NPLs (2012), for detailed discussions of 
specific measures related to out-of-court settlement. 

30 

 
 
 
 
                                                            
Graph 38: Insolvency rate in Central and Eastern Europe 

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

%

05

06

07

08

09

10

Bulgaria
Hungary
Romania

Croatia
Latvia
Slovakia
Source: Coface Central Europe 

Czech Republic
Lithuania
Slovenia

11

Estonia
Poland
Ukraine

3.3. Labour market challenges 

This section provides a more in-depth analysis of the interlinked factors behind the relatively 
rapid wage growth (which leads to the adverse ULC trends discussed above) and the overall 
labour market adjustment with a persistent rise in unemployment. 

Over  the  past  decade,  the  Bulgarian  labour  market  has  benefited  from  a  period  of 
strong gains in employment and declining unemployment, which was, however, followed 
by a sharp crisis from 2009 onwards. In the economic boom years (2003-2008) prior to the 
crisis,  employment  grew  consistently  at  a  relatively  high  rate  of  about  3%  per  year,  while 
unemployment  declined  from  almost  14%  of  the  labour  force  to  just  5.5%  and  the 
employment  rate  improved  substantially,  albeit  from  low  starting  levels  (see  Graphs  39 
and 40).  Especially  the  construction  sector  boomed  with  employment  expanding  by  about 
20%  each  year  over  2005-2008.  Following  the  crisis,  Bulgaria  experienced  one  of  the 
strongest drops in employment in the EU, declining cumulatively by about 12% over 2009-
2012.  The  construction  sector  accounted  for  over  a  quarter  of  the  aggregate  employment 
losses,  but  most  other  sectors  were  also  affected.  Part  of  the  fall  in  employment  can  be 
attributed to the strong decline in Bulgaria's working-age population by about 1.5% per year 
due to negative demographic trends (low birth rate, ageing population, emigration). However, 
the unemployment rate has also more than doubled from about 5% of the labour force in 2008 
to  over  12%  in  Q3  2012,  thus  above  the  scoreboard  threshold  value.  The  labour  market  is 
forecast  by  the  Commission  to  stabilise  in  2013,  with  only  very  moderate  improvements 
expected in 2014. 

31 

 
 
 
 
Graph 39: Real GDP and employment  
growth    

Graph 40: Employment and unemployment 
rate (% 15-64 years), BG, NMS16, EU-15 

8

6

4

2

%

0

-2

-4

-6

-8

%

70

65

60

55

50

45

01

03

05

07

09

11

Real GDP growth

Employment growth

Employment rate Bulgaria
Employment rate EU-15
Employment rate NMS

00

02

04

06

08

10

12*

Source: Commission services 

The Bulgarian labour market adjustment during the economic crisis stands out in terms 
of  its  significant  job  losses,  but  simultaneously  strong  average  wage  growth,  above 
productivity growth (Graph 41). Employers seem to have overwhelmingly opted for cutting 
jobs rather than  wages,  probably  due  to restructuring needs following a period of economic 
overheating  and  a  sudden  stop  in  capital  inflows.  The  predominance  of  job  cuts  over  wage 
cuts  is  especially  problematic  for  the  vulnerable  labour  market  groups,  sectors  and  regions, 
which also have the least capacity of finding alternative employment. In contrast to most other 
countries,  expenditure  for  active  labour  market  policies  has  been  substantially  reduced  in 
Bulgaria in the midst of the downturn (Graph 42), which might have added to unemployment. 
Graph 41: Unemployment rate and 
compensation per employee  

Graph 42: Expenditure on ALMPs* 

20

18

16

14

12

%

10

8

6

4

2

0

0.5

0.4

P
D
G

f
o
%

0.3

0.2

0.1

0.0

01

02

03

04

05

06

07

08

09

10

11

12

Gross wages and salaries per employee: total economy (y-o-y %ch.)

Unemployment rate: definition EUROSTAT

04

05

06

07

08

09

10

11

BG Labour Market Services
NMS Labour Market Services
BG Total LMP
NMS Total LMP

Source: Commission services 
*Active labour market policies 

16 NMS – New Member States refers to the countries, which joined the EU since 2004. 

32 

 
 
 
 
 
 
 
 
 
 
 
                                                            
The impact of the economic downturn varies significantly among sectors. Between 2008 
and 2011, production was reduced in construction and the primary sector by 19% and 16%, 
respectively, while it was relatively constant in industry and even increased in some service 
sectors. In turn, over the same period, employment was cut by more than 30% in construction 
but also by nearly 20% in industry, while it even marginally increased in some service sectors 
(Graph 43). Productivity growth has remained relatively strong over the crisis and post-crisis 
period in most sectors as well as in the economy as a whole. Part of the growth in productivity 
could  be  driven  by  economic  catching-up  from  the  lowest  level  in  the  EU,  but  it  is  also 
influenced by statistical effects arising from employment being reduced more than output. For 
example, in the industry sector employment declined strongly while output remained stable, 
which resulted in strong growth in statistically-measured productivity (output per employee). 
Overall, sectoral differences seem to explain upward wage pressures in some growth-sectors, 
but do not explain relatively strong wage growth in some crisis-hit sectors. 

Graph 43: Sectoral employment, production, productivity and wage developments 

%
40

30

20

10

0

-10

-20

-30

-40

A
g
r
i
c
u
l
t
u
r
e

C
o
n
s
t
r
u
c
t
i
o
n

I
n
d
u
s
t
r
y

(
e
x
c
e
p
t

c
o
n
s
t
r
u
c
t
i
o
n
)

l

W
h
o
e
s
a
e

l

a
n
d

r
e
t
a

i
l

t
r
a
d
e

I
n
f
o
r
m
a
t
i
o
n
a
n
d

c
o
m
m
u
n
c
a
t
i
o
n

i

Employment

GVA volume

Change in production per hour

Change in average wage 2008-2011

i

F
n
a
n
c
a

i

l

a
n
d

i

n
s
u
r
a
n
c
e

R
e
a

l

e
s
t
a
t
e

P

r
o
f
e
s
s
o
n
a
l
,

i

i

s
c
e
n
t
i
f
i
c

P
u
b

l
i

i

c
a
d
m
n
s
t
r
a
t
i
o
n

i

Source: Commission services 

Low-skilled  workers  were  the  most  severely  hit  by  the  crisis  and  the  ensuing 
restructuring.  While  employment  of  low-skilled  workers  dropped  by  nearly  40%  over  the 
crisis,  it  fell  by  only  6%  for  high-skilled  employees.  Similarly,  the  unemployment  rate  for 
low-skilled stood at 27% in 2011, while for high-skilled it was only 5% (Graph 44).17 

17 For an in-depth study of Bulgaria's labour market see Maiväli and Stierle (2013). 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 44: Unemployment rate by skill level 

%
e
t
a
r

t
n
e
m
y
o
p
m
e
n
U

l

35

30

25

20

15

10

5

0

01 02 03 04 05 06 07 08 09 10 11  12*

Lower secondary education (levels 0-2)

Upper and post-secondary education (levels 3 and 4)

Tertiary education (levels 5 and 6)

Source: Commission services 

Employers thus seem to have adjusted to the downturn by slashing "excess" labour with 
the  lowest  educational  attainment,  weakest  productivity  and  corresponding  low  wage 
levels. Purely statistically, this change in the composition of employment raises the average 
wage of the economy, as well as productivity (output per employee). This effect seems to be 
confirmed by the sectoral wage and employment data, which shows that, contrary to the usual 
intuition, on average the sectors most heavily hit by the crisis surprisingly show the highest 
average wage growth over 2008-2010 (Graph 45). For example, the construction sector shows 
one of the fastest growth rates in average wages, by 27% over 2008-2010, while also having 
cut the most jobs (34%) in a crisis context.18 However, given that job cuts affect both average 
wages and productivity in parallel, this composition effect should, in principle, not apply to 
unit-labour costs. 

18  The  whitening  of  the  economy  can  have  a  similar  statistical  effect.  Bulgaria  is  assessed  to  have  the  largest 
share of the shadow economy in the EU (Schneider, 2011) and the government has taken measures to improve 
tax compliance and enhance labour inspections. The legalisation of wage payments could play a significant role 
in average wage growth in some sectors, for example retail trade, where the social security minimum thresholds 
have been increased substantially. However, no concrete data are available to quantify those effects. 

34 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Graph 45: Sectoral wage and employment change, 2008 - 2010   

e
g
n
a
h
c
%

t

n
e
m
y
o
p
m
E

l

10

5

0

-5

-10

-15

-20

-25

-30

-35

y = -0.806x + 10.318
R² = 0.177

10

15

20

25

30

Average wage % change

Source: National Statistical Institute 

Large  regional  discrepancies  in  unemployment  existed  already  before  the  crisis  and 
have  remained  prominent.  Currently,  unemployment  rates  range  from  about  6%  in  the 
capital region to over 20% in the poorest regions.  

Regional  variations  in  labour  market  conditions  have  a  relatively  limited  impact  on 
corresponding wage growth rates (Graph 46). For example, in the capital region, the region 
with one of the lowest unemployment rates, average wages grew at a rate of about 10% per 
year  and  thus  far  above  the  national  average. Consequently,  some  part  of  the  average  wage 
growth  appears  to  be  explained  by  wage  increases  in  regions  with  a  tighter  labour  market. 
However, it does not explain wage growth of more than 10% per annum in some regions with 
an elevated unemployment rate. 

The  relatively  rapid  wage  growth  is  influenced  by  a  combination  of  factors,  some  of 
which only affect the statistical average even without actual wage increases. As discussed 
above, these effects arise from job cuts being concentrated in low-paid jobs, while higher-paid 
jobs remained intact, and a reduction in undeclared wages. 

Actual received wages have also increased, driven by convergence from the lowest wage 
levels  in  the  EU,  skills  and  regional  mismatches  and  by  increases  in  minimum  social 
security thresholds bidding up wages (discussed below). Policy measures to alleviate skill 
and  regional  mismatches  are  therefore  crucial  both  for  addressing  the  unemployment 
challenge and keeping ULC growth pressures in check.  

35 

 
 
 
 
 
 
 
 
 
 
Graph 46: Regional unemployment rate and average wage growth  

y = -0.6285x + 21.705
R² = 0.1939

30

25

20

15

10

5

0

1
1
0
2

l

e
v
e

l

t
n
e
m
y
o
p
m
e
n
U

l

0

5

10

15

20

25

Growth in average wage 2009-2011

Source: Commission services 

Wage  setting  appears  relatively  flexible  in  Bulgaria,  according  to  most  labour  market 
institutional  features.  Wage  bargaining  takes  mainly  place  at  firm  level  and  at  individual 
contract  level,  with  a  relatively  low  coverage  of  collective  wage  agreements  (about  14%  of 
employees, Bulgarian National Bank, 2011). Adjusted bargaining coverage19 amounts to 30% 
of employees, which is the lowest in the EU apart from the Baltic countries. About 20%  of 
wage and salary earners in employment are affiliated to a trade union. This is below the average 
of the 12 Member States that joined the EU since 2004, but the average is pushed up by high 
union density in some of these countries (Visser, 2011). In fact, only five of those countries 
have a higher union density. Consequently, while union density does not seem to be a driving 
force  behind  wage  dynamics  in  Bulgaria,  it  cannot  be  regarded  as  exceptionally  low  either. 
The duration of wage bargaining contracts is normally one year, i.e. allowing for changes in 
economic conditions to be taken into account relatively swiftly. Similarly, the degree of wage 
indexation is rather limited. According to a survey conducted by the Bulgarian National Bank, 
about 7% of firms use an automatic inflation-based mechanism and about 17% of firms take 
inflation "implicitly" into account in their wage setting (Bulgarian National Bank, 2011). 

The nation-wide minimum wage played a limited role in the labour market, at least up 
to  2011.  The  minimum  wage  was  frozen  for  two  and  a  half  years  between  2009  and  2011. 
This brought the ratio of the minimum wage to the average wage down from 45% in 2005 to 
35% in August 2011 (Graph 47).20 Recently, the minimum wage was increased by about 29% 
(by 12.5% in September 2011, 7.4% in April 2012 and most recently 6.9% in January 2013), 
reversing  some  of  the  decline  in  the  ratio  to  the  average  wage.  Nevertheless,  the  new 
minimum  wage  of  about  160  euros  per  month  remains  the  lowest  in  the  EU.  Similarly,  the 

19 The adjusted bargaining coverage gives the share of employees covered by wage bargaining agreements as a 
proportion  of  all  wage  and  salary  earners  in  employment  with  a  right  to  bargaining,  expressed  as  percentage, 
adjusted for the possibility that some sectors or occupations are excluded from the right to bargain. 
20  At  first  sight,  the  figure  of  45%  might  seem  relatively  high  in  an  international  comparison,  especially  for  a 
catching-up economy. However, part of this high number might be explained by the grey economy, i.e. by an 
artificially reduced figure for average wages due to undeclared wages. 

36 

 
 
 
 
                                                            
share of employees receiving the minimum wage has fallen from 16% to 6% over 2005-2011 
(Graph 48).  

Graph 47: Minimum and average wages, 
2005 - 2012  

Graph 48: Coverage of minimum wages, 
2005 - 2011  

BGN

800

700

600

500

400

300

200

100

0

01

03

05

07

09

11

13

Monthly average wage (lhs)

Monthly minimum wage (lhs)

Minimum wage as % of average wage (rhs)

Source: Commission services 

%

50

45

40

35

30

25

20

15

10

5

0

400000

350000

300000

250000

200000

150000

100000

50000

0

%
18

16

14

12

10

8

6

4

2

0

05

07

09

11

Number of persons working at minimum wage (lhs)

Share of persons working at minimum wage (rhs)

While  most  institutional  features  do  not  seem  to  significantly  limit  labour  market 
adjustments,  an  exception  appears  to  be  the  system  of  minimum  social-security 
thresholds.  This  system,  implemented  with  a  view  to  combating  the  shadow  economy  and 
improving tax collection, sets over 700 different minimum-income thresholds across about 85 
sectors  and  9  occupations  for  the  calculation  of  social  security  contributions.  Also,  a 
maximum  limit  for  the  social-security  tax  applies,  capped  at  a  wage  income  of  2200  leva, 
which is slightly over 1100 euros per month.21 All employees and self-employed are covered 
by  this  system.  The  minimum  thresholds  are  agreed  between  social  partners  or,  in  case  an 
agreement  is  not  reached  for  some  groups,  these  thresholds  are  administratively  set  by  the 
government. While social security contributions have to be paid according to these thresholds, 
actual wages can be lower as long as they comply with the statutory minimum wage.  

The  declared  wage  of  over  one  quarter  of  all  employees  is  close  to  their  respective 
minimum  threshold  (+/-10%  around  the  threshold).  This  is  substantially  higher  than  the 
coverage  ratio  for  the  statutory  minimum  wage.  The  thresholds  range  from  the  minimum 
wage for some unskilled workers to more than five times the minimum wage for managers. 
While  this  dispersion  could  seem  reasonable  at  first  sight,  in  some  sectors,  even  for 
elementary occupations, the thresholds are significantly above the statutory minimum wage. 
Consequently,  according  to  unpublished  data,  the  minimum  thresholds  are  on  average  only 
about  20%  below  the  average  income  in  the  same  sectors/occupations.  Overall,  in  low-paid 
sectors and occupations, the minimum thresholds have a higher coverage and are closer to the 
average wage than in other sectors and occupations (Table 2). 

21 The social security tax rate is 30.3%, of which over half is paid by the employer. 

37 

 
 
 
 
 
                                                            
Table 2: Coverage of minimum thresholds and ratio to average income 

Share of em ployees from  total 
insured at m inim um  level (+/-10%) 

Minim um  threshold incom e 
ratio to average incom e

TOTAL

Managers

Professionals

Applied specialists

Clerks

Service and retail w orkers,

Skilled agricultural w orkers

Craft and related trade w orkers

Machine operators and assemblers

Elementary occupations

27.0

8.0

6.0

10

14.0

36.0

32.0

27.0

29.0

30.0

79.0

68.0

70.0

71

75.0

93.0

90.0

81.0

83.0
94.0    

Source: Commission calculations based on unpublished data 
Note: Data calculated as weighted average across industry groups  

These  thresholds  are  commonly  considered  by  social  partners  as  indicative  minimum 
wages  by  sector  and  occupation.  Thus,  the  increases  in  thresholds  have  some  impact  on 
wage  demands  in  the  same  sectors.  While,  in  principle,  threshold  increases  should  follow 
actual wage trends in the economy, there are some incentives to push for higher thresholds. 
Employee organisations have an incentive to ask for higher thresholds as this indirectly leads 
to  higher  wages.  The  government  also  has  some  incentives  for  increasing  thresholds  as  this 
directly  adds  to  tax  revenues  and  reduces  the  shadow  economy.  At  the  same  time,  the 
potential  adverse  impacts  on  employment  might  be  overlooked  since  these  effects  are  less 
immediately evident. 

It appears that especially for the low-skilled employees, the thresholds did not allow for 
sufficient  downward  flexibility  in  the  context  of  the  economic  crisis.  Most  of  the 
thresholds were increased substantially also during the crisis. The thresholds for some of the 
sectors and occupations severely affected by the crisis were frozen for several years, but they 
were not reduced. The  weighted average annual growth  rates  of  the thresholds  amounted to 
about 5% in 2010 and 7% in 2011, which probably played a role in influencing wage demands 
for the entire economy. It could be expected that the increases to the various thresholds would 
take account of differing sectoral conditions in order to avoid excessive increases in crisis-hit 
sectors.  Remarkably,  the  correlation  between  a  change  in  employment  and  increases  in 
thresholds in the same sectors and occupational groups is very weak (Graph 49). This might 
indicate  that  the  increases  in  thresholds  did  not  take  sufficient  account  of  differences  in 
sectoral and occupational employment conditions.  

While  Bulgaria  has  an  overall  low  tax  wedge,  the  system  of  minimum  social  security 
thresholds  implies  a  higher  tax  wedge  for  low-paid  jobs.  Bulgaria  has  introduced  a  flat 
income tax of just 10%, the lowest rate in the EU and has been able to substantially reduce the 
tax  wedge,  including  social  security  contributions  to  be  paid  by  employers  and  employees. 
Over time, Bulgaria's tax wedge has fallen below the EU average (Graph 50). Social security 
taxes (aggregate tax rate of slightly over 30%) constitute a relatively large share in the overall 
labour  tax  burden  in  Bulgaria  given  the  very  low  flat  income  tax  rate.  Crucially,  with  a 
maximum cap at about three times the average wage, the system of minimum social-security 
thresholds implies regressive taxation for some income groups (higher effective tax rates for 
low-paid  employees,  whose  actual  wage  is  below  the  social-security  income  threshold  and 
lower taxes for the high-paid). While the aim of the thresholds is to fight undeclared wages, 

38 

 
 
 
C
h
a
n
g
e

i

i

n
m
n
m
u
m

i

t
h
r
e
s
h
o
d
s

l

35

30

25

20

15

10

5

0

-5

-10

paradoxically,  the  regressive  taxation  effect  could  lead  to  an  opposite  effect  and  push  those 
jobs into the shadow economy, where the actual received wage is below the threshold used for 
taxation. 

Graph 49: Rates of change of minimum 
threshold and employment by sector and 
occupation, 2009 – 2011 

y = 0.0542x + 8.7826
R² = 0.0256

Graph 50: Tax wedge on labour income 

%

45

40

35

30

-60

-40

-20

0

20

40

60

Change in employment

98

00

02

04

06

08

10

BG
NMS unweighted average
EU27

Source: Commission calculations based on 
unpublished data 

Source: Commission services 

The government has made some progress in differentiating the growth of social security 
thresholds  according  to  sectoral  and  occupational  economic  conditions.  As  part  of  the 
negotiations of the 2013 thresholds, the government has decided to keep the limits for those 
professions unchanged, where the employers and employees were unable to reach a decision. 
This has also resulted in a lower average increase of the thresholds.  

39 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4. POLICY CHALLENGES 

The  analysis  in  sections  2  and  3  has  shown  that  Bulgaria  continues  to  experience 
macroeconomic  imbalances  which,  while  not  being  excessive,  need  to  be  addressed.  In 
particular,  the  country's  external  indebtedness,  corporate  sector  deleveraging  pressures  and 
labour  market  adjustment  in  response  to  the  crisis  present  the  main  policy  challenges.  It 
should be recalled that these challenges and the labour market concerns in particular, as well 
as relevant policy responses, were integrated in the country-specific recommendations (CSRs) 
issued for Bulgaria in July 2012. The assessment of progress in the implementation of those 
recommendations  will  take  place  in  the  context  of  the  European  Semester.  Against  this 
background,  this  section  discusses  different  avenues  that  could  be  envisaged  to  address  the 
challenges identified in this IDR. 

Concerning  the  challenge  of  achieving  a  sustainable  level  of  external  indebtedness,  the 
following measures may be discussed: 

Attracting  more  capital  in  productive  sectors  would  be  beneficial  for  future  economic 
growth. As a small open economy, Bulgaria remains inherently vulnerable to external shocks 
and  depends  on  foreign  financing  to  fuel  its  output  growth.  In  the  years  leading  up  to  the 
crisis,  the  country  saw  significant  investment  in  real  estate,  which  was  partially  responsible 
for inflating an asset price bubble. Improving the business environment would allow Bulgaria 
to attract more investments in productive sectors and would improve future economic growth 
prospects. This would help the country grow out of its external indebtedness in the medium 
and long term through increases in economic output. The business climate could benefit from 
further reduction of administrative costs and red tape and from improving the efficiency of the 
judiciary to ensure a level playing field.  

Better EU funds absorption would help placing Bulgaria on a higher growth path. The 
increase  in  output  the  post-crisis  years,  albeit  small,  has  come  in  part  from  investment 
supported  by  EU  structural,  cohesion  and  agricultural  funds.  Better  funds  absorption  could 
deliver a double benefit to the economy in general and the external indebtedness in particular. 
It  would  have  a  positive  effect  on  future  growth  and  could  also  help  reduce  the  need  for 
external payments and indebtedness through the capital account. 

Concerning  the  challenge  of  reducing  private  sector  debt  and  tackling  corporate 
deleveraging pressures in particular, a number of avenues can be explored:  

Enhancements  in  the  insolvency  framework could  prove  useful  for  increasing  business 
confidence  and  improving  the  investment  climate.  Both  in-  and  out-of-court  settlement 
procedures  may  be  explored  as  options  for  facilitating  orderly  debt  restructuring.  Providing 
guidelines  for  streamlining  negotiations  and  speeding  up  court  proceedings  appears  to  have 
benefitted other countries facing similar challenges.  

Improving  corporate  sector  legislation  and  its  application  by  the  judicial  system  can 
have  a  positive  impact  on  debt  market  clearing.  Measures,  recently  proposed  by  the 
authorities, aim at improving corporate legislation, including the removal of the possibility of 
insolvency backdating. If applied consistently and effectively by courts, those measures could 
speed up and facilitate bankruptcy proceedings, thus reducing uncertainty for economic actors 
and having a favourable influence on the overall business climate. Further to this, court know-
how  and  capacity  to  implement  corporate  legislation  could  be  enhanced  by  following  the 
positive experiences of other countries. 

40 

 
 
 
Strict  implementation  of  rules  on  late  payments  would  relieve  cash  flow  concerns  and 
present a clearer picture of the corporate balance sheet. Arrears on the payment for goods 
and  services  between  non-financial  corporations,  combined  with  the  high  level  of  corporate 
debt, pose a sector-wide risk. Clear rules on the treatment of late payments, in line with EU 
Directive 2011/7/EU, and their strict enforcement can have a favourable impact on business 
relations  within  the  non-financial  sector  as  well  as  between  the  corporate  and  government 
sectors. 

Concerning  the  challenge  of  rising  unemployment  and  job  losses,  especially  in  the  low-
skilled segment of the labour market, the following issues could be considered: 

A  major  challenge  relates  to  the  high  structural  unemployment  level,  reflecting  skills 
mismatches  in  some  sectors  of  the  economy.  Measures  that  specifically  target  the  low-
skilled segment of the labour market, that was the hardest-hit by the crisis, could usefully be 
examined. 

A comprehensive set of labour market measures may be necessary to address the skills 
mismatch  problem,  especially  labour  shortages  in  some  sectors.  High  structural 
unemployment  may  already  be  pushing  up  wages  and  ULC  in  some  sectors  that  have 
recovered  from  the  crisis.  Insufficient  labour  supply  may  result  in  missed  opportunities  and 
impede  economic  growth  in  the  future.  Reforms  in  higher  education,  youth  employment 
programs  and  regional  policy  measures  can  be  considered  as  possible  remedies.  Specific 
measures could be identified as part of the Europe 2020 process.  

Continued increases in the minimum thresholds for social security contributions appear 
to have some adverse side-effects on vulnerable sectors of the labour market. The system 
of  minimum  social  security  thresholds  was  introduced  as  a  measure  to  combat  the  shadow 
economy and may have proved beneficial in that regard according to recent studies. However, 
continued  increases  in  the  thresholds,  including  during  the  crisis  years,  has  brought  those 
social  payment  floors  very  close  to  the  average  wage  in  some  sectors  and  occupations, 
especially  the  low-wage  segment.  Furthermore,  the  system  implies  a  higher  effective  social 
tax  rate  for  the  lower-paid  employees  and  might  price  out  some  low-skilled  segments  and 
regions  of  the  labour  market.  A  careful  examination  of  those  side-effects  may  benefit  the 
threshold-setting mechanism and prevent adverse influence on the more vulnerable part of the 
labour market.  

41 

 
 
 
 
 
 
 
 
 
 
 
 
 
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