Bulgaria Infrastructure Report Q1 2009

The infrastructure sector in Bulgaria has seen some activity the fourth quarter, but this is mainly in project announcements rather than commencements. The thorn in the sector's side, however, continues to be the suspended ISPA and PHARE funds from the EU, which highlight the institutional and deep structural weaknesses in Bulgaria's business environment; with implications, of course, for the infrastructure sector.

The suspension of the funds combined with the financial turmoil - which has severely affected ability for financing projects from the international debt markets - has brought about changes in Bulgaria's infrastructural landscape and prompted BMI to have a more bearish outlook on the country's economy.

We have revised our construction sector forecasts for 2008 onwards. Bulgaria's infrastructure and construction sectors have witnessed stellar growth in recent years, as many foreign and domestic investors have been attracted by combination of the country's pending entry to the EU (realised in January 2007) and its unsaturated construction and infrastructure market.

However, the momentum is fading as the storm of the global financial turmoil gathers pace in Europe and affects the economies of the region. In BMI's Bulgaria Q109 Infrastructure Report, we forecast that construction industry real growth will be 4% in 2009, with the construction industry value at BGN5.3(US$3bn). For 2008 we have also revised downwards our estimates for industry value to BGN4.4 from BGN4.7bn Although the value of the construction industry per se is forecast to remain quite low - averaging around BGN6.2bn every year between 2009 and 2013 - the industry will contribute an estimated average of 7.8% to the GDP over the period. This value underlines its value for the economy, and thus the threat its potential downturn poses.

Compared with fellow Eastern European countries, Bulgaria has a poor track record of administrative and legal reforms - a situation that started to improve following Bulgaria's membership of the European Union, but which the EC fears has faltered once more. It is largely believed that bureaucratic delays have proved to be a serious constraint for the nation's infrastructure sector. The withdrawal of the ISPA and PHARE funds further deteriorates the situation, and also Bulgaria's standing as an investment destination.

On the upside, inflation - which has been a key concern and has been responsible for many project delays and cost overruns across the spectrum - is forecast to abate to 6.5% for 2009. This will come on the back of slower macroeconomic growth. Furthermore, Bulgaria's strong GDP surplus is forecast to be between BGN1.8bn (US$1.25bn) and BGN2bn (US$1.4bn) up until 2012, providing a cushion for the infrastructure spending programme. The tight credit conditions on global markets that are affecting project financing operations, however, remain our a key concern for Bulgaria's infrastructure sector, as the government relies on the private sector financing to support long-term projects.