The case for investing in Bulgaria

8/3/2019 The case for investing in Bulgaria

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Low currency risk

The Bulgarian lev has been pegged

at a fixed rate to the Deutschmark in

1997 (since 1999 to the Euro).

Because of this, Bulgaria has thelowest currency risk among non-

Eurozone members in the EU.

BULGARIA

The case for investing in Basic facts:Population: 7 M

Surface: 110K sq km

EU member 2007

NATO member 2004

GDP: EUR 35 B

GDP growth: 2% p/a

Median income: EUR

350 p/m

BULGARIA: EUROPES PRODUCTION CROSSROADS OF TOMORROW?

Bulgaria is a former communist country, strategically located on the Black Sea in Southeastern Europe,bordering Turkey, Romania, Greece and the former Yugoslav republics of Serbia and Macedonia. EU member

since 2007, Bulgaria has the regions highest rate of currency stability and is the only EU country to have

received a credit rating upgrade since 2007.

With a land mass of 110 000 sq. km,

Bulgaria is roughly similar to Greece, and with

a population of 7 million, equal to Switzerland.

Once a backward peasant society that

endured unrest well into the 20th century,

Bulgaria has consolidated its position in the

Balkans during socialist rule (1944-1989), when

the country saw double-digit economic growth

and a vast increase in agriculture and industry.

As socialism unraveled, so did the large

Soviet-bloc market for Bulgarian produce,

causing the country to shrink its economy by

44% between 1988 and 1996. Austerity-

guided reforms saw Bulgaria peg its currency

to the Deutschmark (now Euro) in 1997 via a

currency board agreement. With a rise in

tou rism and mark et- orie nte d fore ign

investment, Bulgaria regained socialist-era

GDP levels by 2006, while it joined NATO in

2004 and the EU in 2007.

Within the EU framework, Bulgaria is an

advanced transformational economy. GDP

growth in 2000-2008 was at an average 5%,

while the rebound from negative growth in

2009 has been at 0.2% in 2010, and an

estimated 2% in 2011, placing both current

and projected further growth at over 2x the EU

average. As the countrys per capita annual

GDP is the lowest in the EU (EUR 4.860),

Bulgaria is very likely to enter a period of high,

sustained convergent growth in the coming

decade.

Up to 85% of Bulgarias surface is

suitable for high-grade agricultural purposes.

Paired with the lowest land prices in the EU,

Bulgaria has a clear potential to emerge as a

leading hub of agricultural and industrial

production. Education levels are at EU average

in Bulgaria, while 75% of the population live in

urban areas. With salary levels being lowest in

the EU (median annual salary EUR 3.550),

Bulgaria offers scalable production advantages

for markets in the EU, Turkey/MENA and the

CIS.


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Growing pains: restructuring FDI

When socialism ended in 1989, FDI in

Bulgaria was non-existent. Since the economic

reforms of 1997, investments grew to a modest

annual 1B USD in 2002, continuing a sharp rise

to 13B USD per annum in 2007, prior to the

global financial setbacks that started in 2008.

Since then, FDI decreased again to 2B USD in

2010, with 2011 indicators showing a further

decrease to 1B USD.

Foreign investments that led to high

growth in 2002-2007 were mostly at SME level

and targeted at tourism and consumer

potential, fueling real estate construction and

local spending, which in turn induced further

market-oriented investments. In the aftermath

of the 2008 financial crisis, and amidst general

uncertainty regarding the European economy,

opportunistic investors in non-tradable sectors

have been wary of returning to Bulgaria. The

country remains highly underdeveloped, both

as a local market, as well as a holiday

destination. Because of economic uncertainty

though, holiday-makers and recreational

home-owners are reluctant to return in

numbers high enough to warrant expansive

non-tradable growth.

However, due to structural advantages,

Bulgaria has an excellent outlook for attracting

qualitatively different FDI by welcoming

investors with strategic opportunities, shaped

by its potential in production and logistics.

Emerging Europe: evolution of

politics, economy, and public

administration

Bulgarias rogue post-communist politics

and perceived high level of corruption have

been seen as a challenge to the countrys

growth. However, a clear focus on European

integration, coupled with an austere fiscal and

monetary policy, have ensured the country

made remarkable progress from the chaos and

poverty of the 1990s. The countrys accession

to the EU in 2007, and NATO in 2004, have

seen the implementation of thorough reforms

in the judiciary, security apparatus and public

administration, that are currently well on their

way to being on-par with EU standards.

Equal ly, trade stan dards have been

synchronized with EU norms, while monetary

risk is uniquely low due to the currency board

agreement.

SUCCESS STORY

Providing regional value:

leveraging production assets

Historically strong inagricultural exports andindustrial engineering,Bulgaria is emerging as alucrative production center,

with labor costs lower thanin surrounding EU countriesand Turkey. As well as

moderate growth in FMCGproduction and a growinginterest in opportunities ofgenerating green energy, newsuccesses also appear inindustry-grade production.

Since 2005, one of thelargest glass producers inthe world, iecam of Turkey,has operated productionfacilities in the Bulgariancity of Targovishte. In 2011,the company opened a new,fourth plant in Targovishte,bringing its total investmentin Bulgaria to over EUR 400M, ranking Sisecam thelargest single source of FDIin Bulgaria. iecam says it

will continue investing inBulgarian productionfacilities, even as demandfor its products, mostnotably industrial glasselements like autoglass, isnot unchallenged. Direct

access to key EU-basedcustomers like majorautomakers plays asignificant role for iecam,

who committed furtherinvestments to its Bulgarianfacilities, despite recentclosures of the companysplants in Turkey.The iecam story is anexcellent example of thevalue that Bulgaria canprovide. A strategiclocation, low prices, andcultural similarity (theTargovishte region has asizeable Turkish-speakingpopulation) have ensured that

a Turkish industry giant issuccessfully paving its wayto EU consumers throughBulgaria.

MORE EXAMPLES OF STRATEGIC INVESTMENT

PARTNERSHIPS IN BULGARIA IN 2011

Chinas largest producer of SUV all-terrain

vehicles, Great Wall, recently opened a

plant in Bulgaria, with a production

capacity of 50.000 vehicles annually,

totalling an investment of EUR 80 M.

German BCI invested EUR 200 M in a

photovoltaic power production plant in

Bulgaria, while Japanese Toshiba is

currently negotiating a deal with the

Japanese government that would see Bulgaria

build one of the largest photovoltaic parks

in the world, totalling an investment

estimated at EUR 1.2 B.

The Bulgarian government is in talks with

various partners regarding a public-private

partnership for the building and

reconstruction of Bulgarias sports

stadiums, raising private investments of upto EUR 200 M.


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COMMON INVESTMENT THEMES

Strategic location:

Bulgaria connects Turkey and Greece with the rest of Europe,

and Europes East with West. By road, major cities like Istanbul,

Athens, Belgrade and Bucharest are only several hours away.

From its two major sea ports of Varna and Burgas, ports in

Turkey, Ukraine, Russia and the Caucasus are easily accessible,as well as the open seas.

Lowest labor and land prices in Europe.

Improving credit ratings:

Bulgaria received an upgrade to Baa2 from Moodys in July

2011, the only EU country receive an upgrade since 2007.

Low political and security risk due to NATO and EU

membership.

Lowest currency risk in non-Eurozone EU due to

currency board agreement.

Lowest corporate and personal income taxes in Europe

(10% flat both).

Vast application of EU regional and structural funds

Obstacles remain

While it is true that Bulgarias development warrants an optimistic outlook

for economic growth in the coming years, there are also reasons to be

cautious when it comes to this market. Although thorough reforms have

transformed public administration as a result of EU accession, Bulgaria still

lags behind in transparency and battling organized crime. Infrastructure,

though being developed rapidly, is still far behind from the levels of Western

Europe, as is energy efficiency. The current uncertainty about the future of

the Euro also has the potential to derail growth in this early-stage emerging

economy.

INDUSTRIAL PRODUCTION AGRICULTURE SUSTAINABLE ENERGY NANOTECHNOLOGY

Excellent conditions for

greenfield projects

Low operational cost

Excellent transport links to

large, developed markets

Cultural affinity and highworker aptitude

Abundant, underused, and

underfertilized arable land

Undervalued land assets

Climate and soil similar to

developed Southern

European production sites

Largescale potential for

upmarket biological produce

Rapidly developing, still

underpenetrated

photovoltaic market

Undeveloped biomass fuel

potential

Undeveloped geothermal

energy potential

Strong assets in

pharmaceuticals, still

underpenetrated

Large base of highly-

educated specialists

Development of several

science parks inprogress

TRADABLE MARKET

OPPORTUNITIES IN BULGARIA:

PIONEERING UNPARALLELED

ADVANTAGES

WITHIN THE EU

For investors willing to take a long perspective on a

higher risk market, investing in Bulgaria may be

very attractive. The country remains strongly

underpenetrated in terms of investment opportunity

in tradable sectors, while the strategic and macro-

economic advantages of serving large, adjacent

markets are strong, with political and economical

risks being low. In addition, a relatively low

correlation to markets of neighboring Eastern

European economies may make an investment in

Bulgaria an attractive diversification tool.

For more informaton, please get in

touch:

Maxim Gurvits

+359 88 685 2881

[email protected]

Documents

The case for investing in Bulgaria