site.btaBulgaria's Chances of Avoiding Worst in Possible Recession

Between 2020 and 2021, the COVID pandemic disrupted the global economy. Then came the Russian invasion of Ukraine in February 2022. Prices went skyrocketing, and economic volatility spoiled investment plans. Is there a global recession looming on the horizon? If so, can Bulgaria cope with it?

These questions were discussed in the analytical part of the Bulgarian National Television central evening newscast on Sunday. The analysis, authored by journalist Svetozar Kostadinov, involved interviews with three economists.

Is recession looming?

"We have been flirting with recession ever since 2019, that is, since before COVID," said Kostantsa Rangelova of the Centre for the Study of Democracy.

Noting that the economic downturn of 2007-2009 was triggered by the United States, Jeffrey Nilsen of the American University in Bulgaria said that things look different this time. "Unemployment in the US is 3.5%, which is a very low level, and the interest rates of the Federal Reserve are not high enough to slow the economy," Nilsen said.

If no recession seems to be coming from the US, could it be taking shape in China, whose economy is slowing down? Nilsen argued: "Their GDP was below expectations, but I do not think they will become a source of global recession unless they invade Taiwan."

The US economist suggested that Europe could trigger a recession due to the price spike for energy resources.

Rangelova commented: "We are in a situation where Russia is trying to destabilize the EU by discontinuing natural gas supplies before we shake off our dependence on them. That is why gas prices are extremely high and are pushing electricity prices up."

The oil embargo and Bulgaria

Lachezar Bogdanov of the Institute for Market Economics said: "Natural gas is not so important for the Bulgarian economy. In a way, Bulgaria has even benefited from the situation, because the gas spike has caused electricity prices to rise as well - and Bulgaria is a major net exporter of electricity generated mainly from local resources. That is why some people here have earned excessive profits, making it possible to mitigate the effects of the economic crisis for other businesses and keep electricity prices low for households."

Experts say that oil is a more important instrument than natural gas for influencing the Bulgarian economy. Rangelova stressed: "Oil, rather than gas, is the main source of revenue for Russia. It is the EU oil embargo that can really hurt Russia. But there is the problem of exemption."

Bulgaria is among the countries which have been granted exemption from the EU oil embargo on Russia, although the Burgas Lukoil refinery can process oil from international markets and is already doing so, according to the author.

"Exemptions should be abolished because they have been proven unnecessary and have even increased the dependance on Russia," Rangelova insisted.

According to a report by the Centre for the Study of Democracy, the supply of crude oil from such a distant country as Algeria would increase fuel prices in Bulgaria by just 1%. "The exemption will not influence fuel prices in Bulgaria, it only serves Russia's interests," Rangelova said.

The Russian owner of the Burgas Lukoil refinery denies other market players access to the only oil terminal in Bulgaria, the author also said. It also controls the pipelines in Bulgaria's interior. In effect, Russia's Lukoil controls 90% of the Bulgarian oil market.

Bulgaria's doing well

Despite the challenges in the energy sector, the Bulgarian economy is doing well. The country boasts the highest industrial production growth in Europe, which is an unprecedented achievement, and five economic sectors have recorded growth rates of over 30%. Bulgarian industrial exports hit an all-time high. The retail price index went up by 5%, year on year, and 7.5% compared with the beginning of this year. Half-year state revenues increased by 14%, year on year.

Bogdanov said: "Over a very wide range, almost throughout all subsectors, Bulgarian industry is coping and is practically reaching unprecedentedly high levels for the whole period since records began. We are talking here about quantities, growing amounts of goods offered."

According to Rangelova, one of the advantages of the Bulgarian economy is that it is very stable at present. The first quarter of 2022 saw a 4% GDP growth, and the industrial indices are fine. "So the economy is in relatively good health, which gives us an advantage over some other countries," Rangelova added.

Can the worst be avoided?

This is the current picture, but it can change. Businesses are adapting to a situation marked by high demand, despite rising prices. The global economic slowdown, however, will cut on demand, which will bring end-prices down while keeping energy resource prices high.

Bogdanov said: "Bulgarian goods are in relatively high demand internationally, although they have become more expensive. International buyers are ordering even larger amounts of them than before. That is why exports grew by 60% in May. Perhaps 15 to 18 percentage points of it was real growth and 40 percentage points was due to the price spikes."

The Bulgarian economy is export-oriented, Bogdanov noted. "If the Eurozone economy cools, the Bulgarian companies which export to the EU will be affected. If the economic environment worsens further, Bulgaria should use its experience from earlier periods to make sure that EU aid is spent well. The EU money available for investments should be used at the precise moment it is intended for - unlike before, when large EU resources were available to Bulgaria for the period 2007-2013 but were not used during the economic downturn of 2009-2011. They were used as late as in 2015, when the economy had already picked up."

Another opportunity is to attract a strategic foreign investor. One example is a major producer of electronic chips that is considering setting up new enterprises in Europe. Bogdanov noted: "We are talking here about an investment in the order of USD 5 to 10 billion or even 15 billion over the course of a few years and the creation of 5,000 to 7,000 skilled jobs. By successfully attracting such private global investors, Bulgaria can mitigate or offset an economic slowdown and even a recession caused by other factors," Bogdanov suggested.

All three economists interviewed for the programme believe that the Bulgarian government should focus on measures which improve people's lives and raise the standard of living. Such measures include investing in infrastructure, using market mechanisms to boost incomes, implementing a sensible fiscal policy and providing targeted support for vulnerable social groups.