Bulgaria: Q1 Slowdown Raises Pressure to Relax Fiscal Reigns, but Risk of Overshooting Inflation and Eu Entry Targets Will Sustain State-Sector Reform and Privatisation

Summary

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Renewed suggestions from the EU that its report next week will not be the final word on accession underline the ground that must still be made up, especially on judicial reform, corruption and crime reduction. Anything short of a wholehearted recommendation for 2007 membership will represent Brussels' attempt to maintain pressure for continued institutional improvement and harmonisation effort without inflicting the loss of incentive that might arise from unambiguous delay. Because any deferral would be for only a year, it would not in itself pose a serious risk to the inward investment flow on which Bulgaria currently relies to finance its external deficit and maintain rapid growth. A bigger danger to investment attractiveness lies in insufficiently rapid updating of the physical infrastructure and skills base, a task for which the government's fiscal constraints leave it largely dependent on post-privatisation investment commitments in energy, communications and basic industries. A major international fund-raising by the biggest steelworks, following its privatisation last year, indicates continued willingness to finance Bulgaria's industrial modernisation and thereby finance its external deficit. The central bank's plan to be ready to adopt the EUR by 2011, even if EU membership is delayed to 2008, helps reinforce its message that the current inflation upturn can soon subside if there are no more fuel price shocks. But its credibility depends on the government resisting pressure for sudden fiscal relaxation, which is likely to grow if recent efforts to secure the EU timetable are seen to have failed.

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Bulgaria: Q1 Slowdown Raises Pressure to Relax Fiscal Reigns, but Risk of Overshooting Inflation and Eu Entry Targets Will Sustain State-Sector Reform and Privatisation

Central bank plays down risk to investment of EU accession delay...

As Bulgaria prepares for a hedged European Commission report on 16 May that might delay its next enlargement decision beyond the June summit, the central bank is keen to persuade investors that a year's delay will inflict no particular damage. Governor Ivan Iskrov's assertion is a bold one, given that the wide current account deficit must be financed mainly through foreign direct investment ...

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