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Victoria Mindova

Alexander Bebov is a partner in the "Balkan Advisory Company," who has worked for JP Morgan, Merrill Lynch, Chemical Bank and Prudential Securities. He holds a Master's degree in Public Administration from Harvard University, he also studied at the University of Maine and the Stern School of Business, New York. He commented on the recent developments in Greece and Bulgaria before GRReporter and gave his views on the repercussions that they may have on the economic prospects of the two countries.

How do you think the political uncertainty in Bulgaria following the resignation of the government will affect the business climate?

The resignation of the government as well as the political uncertainty have a negative impact on both new investments and the market of mergers and acquisitions in general. I definitely think that this uncertainty will continue in the short term. Those who want to sell their companies will wait if the circumstances are not pressing them. Those who want to buy will put an additional risk premium not only for the country but also for the company. Investors prefer to buy at a little higher prices (anyway, the prices in the Balkans are lower than the peaks of 2008) but to be away from the political uncertainty or the phenomenon of streets dictating the rules.

I do not mean that the demands of protesters in Bulgaria are not justified and there should be a corrective in the face of civil society but in the current situation, new investors will wait for the certainty of the investment environment to improve before making the first steps towards the Bulgarian market.

It is not very clear abroad why the people in Bulgaria have been protesting. Do you think that the protests in Bulgaria are a response to the general crisis in Europe or are they a derivative of mistakes of the system of the country?

There are similarities and differences between the crisis in Europe and the developments in Bulgaria. The main differences are that the cuts in incomes in the countries of the European periphery not including Bulgaria started to decrease from a much higher basis. The incomes of Italian, Portuguese or Greek households have been drastically reduced. The crises in these countries has come for different reasons - inflated property prices in Spain and Ireland, the banking crisis in Ireland too, but they are mostly due to padded state budgets. The main effect of the different factors related to these issues has been to drive the people from the countries of the European periphery to go out into the streets.

It is the opposite in the case of Bulgaria. From 1997 onwards, various governments have been doing whatever they can to maintain stable macroeconomic indicators. This has become possible at the cost of low incomes. Over the years, the governments have been maintaining a very strict fiscal policy and meeting the requirements of the currency board, which is the main reason for the extremely good state of Bulgaria’s budget and debt compared with the European Union and even the United States.

The problems in Bulgaria stem from the fact that it remains the poorest country in the European Union. Despite the attempts by various governments over the years and the efforts of the last government as regards infrastructure projects and the absorption of European Union funds, Bulgaria remains a poor country. The riots this winter are just an expression of this dissatisfaction. They started with the high electricity bills for December and January. Then, the spirits were awake and the people began asking, "What is the reason for the high bills?" When the issue grew, it became clear that private energy distribution companies have been hiring close advising firms, paying them big money for their services.

The problem is that the Energy Regulator and various governments have been approving those amounts. This is what has caused the protests in Bulgaria. There are extreme demands like the nationalisation of the energy distributors that I would never support but the issue of transparency and control exercised is very serious.

As you have said, the macroeconomic indicators of Bulgaria are very stable but it has failed to achieve sustained economic growth and attract strong strategic investments despite them. Why is that?
 
I cannot completely agree with you that Bulgaria has not attracted large strategic investments over the years. There are names of strategic investors in the country. The problem is that their presence on the Bulgarian market has not been used to the best advantage in order to attract new investments and to apply the so-called "domino effect". Another problem with this type of investors is that no effective control has been exercised and their activities have not been transparent enough. It is not enough just to attract investments. We must observe whether the investor meets its obligations. In other words, we cannot say that there have been no large strategic investors in Bulgaria, but the approach to them has not been correct.

One of the weaknesses of Bulgaria is that it sold most of its assets at very low prices. Another one is that it did not wait a while before selling them.

What are the most unsuccessful privatisations in Bulgaria?

I will not provide names, but the privatisation in the banking sector could have happened at a later stage or it could have been sold at better prices. We have such examples in the energy sector (beyond electricity) as well. In the field of electric power, it is enough to look at the very favourable conditions available to the management of ContourGlobal Maritsa East 3 TPP and AES Maritza East 1. There are other examples but the Bulgarian privatisation could have been implemented at a higher price in general.

Privatisation often takes place in adverse economic times and market prices are always low then.

If more marketing efforts were made like engaging a major investment bank from London, for example. It may seem expensive at first but the effect of such a service accumulates at the end of the programme. Such companies can make the marketing process much better, which gives much better results if no efforts in the preparation process have been made.

Privatisation is the basis of the Greek government programme to restore economic growth. It has been delayed for almost two years now but analysts say that the privatisation is the only trump card of the country in order for it to emerge from the recession. Do you think that a dynamic privatisation programme could be the driver of economic growth for a country like Greece?

I agree that privatisation could be a driver of economic growth but we see that it has been delayed for a few years in Greece. Now, Greece has reached the moment when it has to agree with everything those abroad say or to formally declare state bankruptcy. It depends on the Greek authorities how or whether they will implement the privatisation programme. It will not be an easy task for sure because many foreign companies do not trust the Greek environment today.

What do you think are the strong points of the Greek privatisation programme and what can we expect in the near future?

These are telecommunications, banking and other industries in which Greek business has a strong influence in the region. Whether they will be willing to part with some of these assets or not is another matter. We do not expect major changes in the short term. An important issue remains the economy and the political decisions after the parliamentary elections in Germany in the autumn. It has been necessary to support Greece because of the systemic effects of the crisis until recently. Now, immediate measures with medium-term effect are necessary because otherwise things will continue to deteriorate. Greece's debts are so great that if no action is taken, they will be permanently unstable.

Greece has a long way to go but I would like to go back to Bulgaria for a moment. We have made it clear that our country has strategic investors and a stable macroeconomic framework. At the same time, there is no economic growth and it remains a poor country. What are the main reasons?

Our agriculture and related sectors are in extremely poor condition. It could have been one of the three key sectors to become a driver of economic growth, but we never developed it.

We are very well aware of French agricultural companies operating successfully in cooperatives, and we ourselves destroyed this sector with the changes imposed in 1990-1992. Agriculture could have been one of the driving forces of the Bulgarian production. We divided the land into small fragments between large numbers of owners in the cities, depopulated the villages and instead of consolidating and strengthening agriculture, we destroyed it. Agricultural cooperatives in France buy a large quantity of consumables at discounted prices; the farmers work together and can be competitive as a result.
 
Another profitable sector that has great potential for development is energy and electric power in particular. Bulgaria is in the centre of the Balkans geographically and it is not very easy to circumvent it. We have been traditionally exporting electricity to the region. This sector is associated with long-term investment and can develop well enough to provide cheap electricity to avoid protests like those we faced this winter. There must be reasonable projects to support the sector and keep us a step ahead of the competition, not to run after countries such as Turkey or Romania potentially in the future. This strategic sector can bring a lot of revenue, supply cheaper electricity, and allow the households and the businesses that operate in Bulgaria to take a breath.

These are the two sectors that could have been very competitive, but they were not sufficiently addressed. Very serious mistakes were made in agriculture and now, it is not easy for the people to return to the villages. As regards electric power, I do not see it going in the right direction either.

How has the Greek crisis affected Bulgaria? What are the negative effects and are there positive effects?

I do not think that the Greek crisis has caused any drastic damage to the Bulgarian economy. The effect of the financial crisis on the neighbouring country is rather indirect. In terms of uncertainty associated with our southern neighbour, including uprisings, strikes and riots, some foreign investors may have preferred to wait for some stabilisation before entering the Bulgarian market. The situation in Greece in general has a negative influence on the Balkans, but it is indirect and cannot be easily neutralized unfortunately.

It would be an exaggeration to speak about significant positive effects of the crisis. Small Greek businesses have transferred to the country but this is tax migration in practice.

What is your position on the accession of Bulgaria to the euro zone?

Bulgaria meets most of the criteria of the Maastricht Treaty anyway and the accession to the euro zone will not change the situation very much. I do not think that entering the monetary union will have a dramatic effect because the economy is closely tied to the euro already. I do not expect any developments as regards this issue in the short term. The dialogue can be renewed at the first signs of stabilisation, which we do not expect to appear before 2014. Perhaps Bulgarian politicians will make a step in this direction after two-three years.