Bulgaria Infrastructure Report Q4 2009

The election of a new government in Bulgaria spells several changes in the infrastructure sector. The new government has set a clear target of reducing debt and deficits by curbing spending. Thus many projects are being re-assessed, primary among them the Belene nuclear power plant (NPP). The Belene NPP has faced several hurdles over the past two years and the all but certain removal of government support for the project may be the final blow.

The European Commission reinstated the Instrument for Structural Policies for Pre-Accession (ISPA) and pre-accession assistance (PHARE) funds for projects in Bulgaria. This was in response to the previous government taking strides to tackle corruption in the infrastructure sector. The decision to reinstate EUR1.25bn in EU funding for transport projects will catalyse construction for several major road projects that were at an impasse owing to the lack of funds, such as the Trakia and Struma highways. In addition, and perhaps most importantly, the vote of confidence from the EC encourages private investors. Already, Deutsche Bank has expressed its intention to act as financier for projects in Bulgaria.

The energy and utilities sector saw some major policy revisions. On the issue of the Belene NPP, the government's final decision on whether or not the project will go ahead is due in September. The new government has also launched a review on the Burgas-Alexnadroupoli oil pipeline.

According to data from the Bulgarian National Bank, foreign direct investment inflows were 50% less in the first four months of 2009 compared with the same period in 2008. Infrastructure projects have gained momentum compared with residential and non-residential construction and did provide support for the overall construction sector. Preliminary H109 data from the national statistics agency show that construction industry value actually increased by 1.3% compared with H108. In BMI's Q409 Bulgaria Infrastructure Report we have revised our forecasts slightly upwards for 2009, anticipating industry value to reach BGN4.5bn (US$3.3bn).

In BMI's Central and Eastern Europe Business Environment Ratings for Q409 Bulgaria has witnessed the steepest decline in overall score. The country's previous position at the top place of the regional table was symptomatic of above-average construction industry real growth and expectations that construction industry value would increase on the back of capital spending rather than any fundamental strength in the overall business and investment environment.

As a result of dwindling external credit lines, shrinking export markets, widespread deleveraging and the gradual consolidation of corporate and household balance sheets, economic growth will continue to slow for the remainder of 2009, with a -5.3% real growth rate expected for this year, down from an estimated 5.8% in 2008.