Every year since 2004 Oxford Business Group (OBG) has published The Report (formerly Emerging Bulgaria), a compilation of penetrating articles about Bulgaria: forecasts and interviews as well as analysis of the economy, infrastructure, real estate, capital markets, industry, banking, media, insurance, tourism, energy, IT, construction and politics.
VAGABOND spoke to Sarah Gkonos, OBG's country director, and Mathew Youkee, OBG's editorial manager – both recent appointees – about their evaluation of Bulgaria
In what way do you compile information for your reports?
We meet representatives from Bulgaria's business sector – executive personnel from every field – we interview them about business practices and explore their analysis, examining the economy from many different perspectives.
Why do you choose to supply political and economic intelligence on Bulgaria? What is the criteria that interests you?
We're presently based in Eastern Europe, throughout the Middle East as well as the Levant, North Africa and South-East Asia. We're also planning to expand to South America. In the Eastern European region, apart from Bulgaria, we report on Ukraine, Romania and Turkey. Currently, 62 percent of our subscribers come from Europe, 20 percent from North America. We have a circulation of 71,900, of which 17,100 are subscribers in Bulgaria. So we cater to an international market, providing an overview of the economy in areas that overseas investors would find beneficial. Hence, we stick to emerging markets because they offer the highest return. It's also a promotional tool for a country. In Egypt, for example, it's extremely difficult to find published statistical information sector by sector. We illuminate possibilities that international investors may not have considered.
What are the main benefits to Bulgaria resulting from EU membership?
EU funds will help infrastructure developments and the open market will present more opportunities for small and medium-term investors in Bulgaria. More important is the psychological advantage to outside investors. The country has had a sound financial system for many years but companies will be reassured now that Bulgaria is a stable EU state. We recently interviewed a businessman who'd worked throughout Eastern Europe. He doesn't just see Bulgaria trying to catch up with Poland, the Czech Republic, and the Baltic States – but sees it overtaking its rivals. Pegging corporate and personal taxation at 10 percent is a good example of this ambitious forward thinking.
Bulgaria's population is ageing and shrinking. What steps can be taken to stop this?
Many skilled workers have emigrated because, as the World Bank reports, they can earn far more abroad – for example in Austria – than here. We need to ease restrictions for incoming Macedonian and Albanian workers.
British citizens are free to relocate to Bulgaria and work here but Bulgarians face restrictions in the UK. When will there be a level playing field?
Bulgaria currently needs to attract bright, dynamic business people from the West because of their expertise. Fewer people here have experience of operating in a capitalist economy. As for the UK it's well known that the influx of skilled workers from countries such as Poland has had a massive boost on the economy. However, public concerns about increased immigration mean that the political will to ease restrictions for unskilled Bulgarians is absent.
Do you see tourism and real estate prospectors continuing to spread from the coast to mountains and small towns?
We're seeing much more growth in Bansko and other mountain resorts. More possibilities exist in small towns – unless you find a really undeveloped area of the Black Sea coast. In January we went to Veliko Tarnovo and there are some beautiful places on offer there.
Are prices still increasing?
Prices will still rise but at a slower rate than before. However, there's still a lot of potential left in the market.
Where in Europe is the best place to buy property in terms of real estate appreciation?
Do you think more foreign businesses will relocate to Bulgaria in the light of cheap labour costs? Is Bulgaria's future – putting it bluntly – to be the EU's sweatshop?
Bulgaria has the short term potential for outsourcing. IBM is opening a call centre here, for example. But Bulgaria would be unwise to base its entire economy on cheap labour because wages are rising.
The average wage in Bulgaria is just 400 leva. How can salaries be raised?
State wages are a different area but private sector wages are rising. It's an employees' market right now. If you talk to general managers it's hard to fill certain posts. To attract them they have to raise wages. Salaries will increase as more foreign competition enters the country because companies must pay more to create a competitive market. Education is also crucial. Bulgaria used to be a brain shop for Soviet IT and technology. We spoke to a World Bank economist who said that a lot of money for research and development is just state money going into state institutions. Private investment in research and innovation is inadequate. Bulgaria has too many small universities – it has 54 tertiary institutions – they need to consolidate and make it worthwhile to have strong research and development centres here. More interaction is needed between the business community and academic institutions.
Why are other former Communist countries – such as Romania – performing better than Bulgaria?
I think, initially, Romania's much larger population of 22 million was an attractive prospect for investors. It's only natural that people focus on larger markets. However, Bulgaria, because of its pro-business government, is becoming increasingly attractive and by some measurements the Bulgarian population appears better prepared for economic growth. For example, the Bulgarian banking assets to GDP ratio was 92 percent at the end of 2006 while in Romania the figure was around 60 percent.
Is there wide scale tax avoidance here?
No, a recent World Bank report actually named Bulgaria as the number one country for ease of paying taxes – you have 10 percent corporate tax, use of an online system and more people declaring their earnings. The cost of collecting taxes has also declined – from 1.1 percent of revenues to 0.6 percent and the system is more efficient and streamlined.
Is corruption undermining the Bulgarian economy?
Corruption levels are high but a study revealed that perceptions of corruption are even higher. People in Bulgaria assume there is corruption even when none exists. In some ways the perception is more dangerous than the reality. This harms economic, business and social transactions.
Is low disposable income – stemming from extremely low wages – an obstacle to the service sector's growth?
Wages will rise. I can't speak for the public sector but a far bigger obstacle to growth is worker productivity. Every year workers should be producing ‘x' amount more than last year…
Isn't that just a euphemism for saying that people should work harder?
No, it's not a question of individuals' efforts or inherent laziness. Bulgaria lacks the necessary incentives for companies to innovate and increase productivity. As you stated in VAGABOND, (issue 13, p. 52) it takes five people to post a letter! Unless you have competition, there's no incentive to reform, to improve management conditions and extract the most from your workforce. If Bulgaria continues with just two percent worker productivity rate, the country won't catch up with the EU. Companies in Bulgaria must be allowed to enter and exit the market more easily. You need greater ease of company registration and more efficient practices. This, in turn, will lead to higher productivity and higher wages.
Do you think Bulgaria will join the euro?
When the inflation rate comes down to an acceptable level. It needs to be just 1.5 percent higher than the average of the lowest three inflation rates in the EU. At the moment that's around three percent so there's a lot of work still to be done.