Bulgaria Infrastructure Report Q3 2008

Activity in Bulgaria's infrastructure sector remains high, notwithstanding bumps along the road in the second quarter of 2008. Private investors continue to show interest for the privatisation of assets in utilities and transport, while the European financial and development institutions are continuing to support the county with loans and programs for the development of infrastructure. In BMI's Q308 Bulgaria Infrastructure Report, we forecast that real growth in the construction industry will peak in 2008 at 16.6%.

Under the National Strategy for Integrated Development of the Infrastructure of Bulgaria from 2006 to 2015, projects are currently underway or being planned across segments, including road and rail transport, aviation, oil, power and water. Due to the growth of tourism in Bulgaria, the country is witnessing a spurt in the number of hotels and resorts, built by both domestic, as well as foreign, players. Moreover, with some key pipelines being planned through its territory, Bulgaria is all set to become Russia's gateway to Europe for oil and gas transportation.

Although the value of the construction industry per se is forecast to remain quite low, averaging around US$5.57bn per year between 2008 and 2012, the construction industry made up over 5% of all domestic production in 2007, a value that underlines its value in the economy.

Compared with peers from Eastern Europe, Bulgaria has a poor track record of administrative and legal reforms - a situation that has begun to improve following Bulgaria's membership of the European Union (EU). It is largely believed that bureaucratic delays and paperwork have proved to be a serious constraint for the nation's infrastructure sector. In addition, many projects in the sector are now reporting rising costs due to inflation and additional project parts that were not included in the original planning, revealing unreliable project design. This is the case with the Belene nuclear power plant and the Sofia ring road.

Inflation is a key concern that has been responsible for many project delays and cost overruns across the spectrum. The other major concern at the moment is the effects of the tight credit conditions on global markets that are affecting project financing operations. We forecast Bulgaria's inflation rate to peak in 2008 at 9.5%, and real GDP to fall to 5.8% from 6.2% in 2007.