FDI Flows in Bulgaria?

BNB data on FDI flows in 2010 justified the expectations for a drastic drop of FDI flows to Bulgaria. Last year there were inflows in the country amounting to EUR 1.359 million, which represents an annual decline of almost 60%. This has been a record-breaking annual decrease in FDI since 1997. The decline appears to be even higher than those in the crisis year 2009, when FDI in the country were 3.282 million or half of the amount for 2008. And while in 2009 lower level of FDI could be related to increased investment risk due to global crisis, then this should not be entirely valid for 2010, when there was some economic recovery. Record-breaking is the low level of FDI as a share of GDP – 3.8%. The expectations of government are that this ratio will reach 5% in 2011, almost the same as in 1998.

Regarding the sectors structure the largest flow (453 million euro) of FDI is in manufacturing. The investments in three sectors – financial intermediation, real estate and trade, which year before the crisis were two thirds of total FDI, in 2010 formed only 5.5%. FDI in the production and distribution of electricity, heat, gas and water seem to be relatively most stable, falling with 13.6% annually in 2010.

Of course Bulgaria is not an exception with respect to the outflow of foreign investment in 2010, but as can be seen from the table it experienced the largest annual decline in comparison with countries in the region. Turkey, even managed to attract more FDI in 2010 compared to 2009.

Source: countries’ central banks, IME calculations

*The data for Albania and Bosnia is for Jan-Sept Jan-Nov 2010

Obviously FDI will not soon reach the levels before the crisis and this is related to the change in the overall economic environment. In the years of economic growth most of the FDI were targeted at sectors allowing quick profits. Accession to the EU also gave its single positive effect.

The drastic change in economic environment, however, requires an appropriate change in the investment policy. The expected recovery of the economy and maintaining macroeconomic stability are necessary but insufficient conditions for “revitalization” of foreign interest in the country.

The government should take quick steps to improve the overall business environment. Steps in this direction were the changes voted by the cabinet in the Limitation of Administrative Regulation and Administrative Control on Economic Activities Act. More efforts should be aimed at faster construction and modernization of road infrastructure. There is serious risk that the delay in projects financed under OP “Transport” will deprive Bulgaria of sufficient funding to execute key projects such as highway construction and train routes. Funds used under the program for the period 2007-2010 are only 5.7% from the estimates for 2007-2013.

Indecisive government actions are still a sensitive topic which doesn’t stay unnoticed by foreign investors. Lack of consistency and the presence of disparate signals, particularly in terms of tax policy, cannot inspire confidence and stability. Before spending money on any advertising campaigns the government should be aware that its daily work is the biggest advertisement for the country.