European Semester: Bulgaria Experiences No Macroeconomic Imbalances

NW 15:22:01 26-02-2020

European Semester: Bulgaria
No Macroeconomic Imbalances

Brussels/Sofia, February 26 (BTA) - A European Commission assessment of Bulgaria's progress on structural reforms, prevention and correction of macroeconomic imbalances says that imbalances identified in Bulgaria in 2019 no longer exist. Important progress has been made in strengthening financial sector governance and addressing outstanding regulatory issues. Moreover, corporate debt has fallen and the non-performing loans ratio has declined, although it remains elevated among corporates, the document says.

In the spring of 2019, Bulgaria was identified as having macroeconomic imbalances relating in particular to vulnerabilities in the financial sector coupled with high indebtedness and non-performing loans in the corporate sector.

The ruling GERB party said that the European Semester findings for Bulgaria were "yet another positive assessment for the structural reforms in Bulgaria and the efforts to address macroeconomic imbalances". MP Alexander Ivanov said that the document identifies "an important progress in strengthening the financial sector management and elimination of many regulatory issues". The finding about decreasing non-performing loans in the corporate sector shows that Bulgarian businesses have no difficulties repaying their debts, he said.

Based on an in-depth review as part of the European Semester, the document says that Bulgaria's growth prospects remain favourable but there is scope to further strengthen the overall resilience and competitiveness of its open economy. It finds that Bulgaria's firm commitment to enter the Exchange Rate Mechanism II provides further impetus to reforms.

The document identifies "significant progress" in three areas, "some progress" in six areas and "limited progress" in seven areas.

The banking sector has continued to strengthen but follow-up measures are expected. Overall, banks are profitable and well capitalized and the ratio of non-performing loans has been falling. "Nonetheless, Bulgaria continues to be among the EU countries with high rates of non-performing loans, especially for non-financial corporations," the document says. It recalls that an asset quality review and stress test conducted by the European Central Bank revealed a capital shortfall in two banks and they were instructed to increase their capital.

The work on banks' resolution plans has advanced and internal rules and procedures introduced in July 2018 are due to undergo review and possible fine-tuning, the document says.

The supervisory framework of the non-banking financial sector has been strengthened, but further action is necessary in the insurance sector.

In another positive finding, the private sector continues to shed debt, while maintaining positive credit flows. Household debt increased due to intensified mortgage lending, but still remains among the lowest in the EU. Non-performing loans remain high but have been steadily decreasing. House prices continued to rise but there are no signs of overheating in the housing market.

The document points out that the insolvency framework roadmap was adopted in June 2019 and the authorities are preparing follow-up steps, including legislative changes and capacity building activities that are crucial to the success of the reform.

The assessment further identifies key structural issues which point to particular challenges for Bulgaria's economy. The labour market improved, supported by solid economic growth, but regional disparities remain high, and the declining working-age population and labour shortages constrain future growth prospects.

The quality and inclusiveness of the education system continue to be challenging, despite ongoing reforms.

Social challenges remain significant and the share of population at risk of poverty or social exclusion, although decreasing, is still very high. The in-work poverty rate remains a concern, particularly for young and low-skilled workers. Income inequality is the highest in the EU and the adequacy and coverage of the minimum income remains insufficient. Reform of social services has been further postponed.

Access to healthcare is limited due to an uneven distribution of scarce resources and low health insurance coverage. Public expenditure on healthcare remains very low and out-of-pocket payments cover almost half of healthcare costs, which is among the highest shares in the EU.

The potential for research and innovation to support productivity remains underutilised. The low level of public and business investment, the inefficient and fragmented research system and weak science-business links remain key obstacles to an innovation-oriented economy.

Improving the business environment and institutional quality remains a challenge, with public administration and e-government reforms progressing slowly. Public procurement remains a concern and the use of an electronic platform, which can increase the transparency of public tenders, remains limited.

Challenges persist in the fight against corruption and Bulgaria still lacks a solid criminal track record of concrete results on high level corruption cases that would help to build public trust. A number of challenges persist, in particular ensuring effective criminal investigations, rebalancing the workload among courts, and streamlining local prosecution service offices.

Bulgaria has taken steps to strengthen the anti-money laundering framework by adopting legislation to complete the transposition of the forth anti-money laundering directive and to transpose the fifth but the new legislation is yet to be assessed.

Inadequately addressed environmental challenges present an obstacle to long-term sustainable growth. Bulgaria remains among the Member States with the largest incidence of pollution-related deaths, with the number of years of life lost due to air pollution and urban population exposure to micro-particles the highest in the EU. There is limited progress in ensuring compliance with urban wastewater collection and treatment obligations. There is still no overarching circular economy programme even though the circular use of material is among the lowest in the EU and there are waste management challenges.

Bulgaria remains the most energy- and greenhouse gas-intensive economy in the EU by a wide margin.

The document will be communicated to the European Parliament, the European Council, the Council, the European Central Bank and the Eurogroup2020.

BTA's Brussels correspondent Nikolay Jeliazkov contributed to this story.