Bulgaria’s political crisis puts RRP funding at risk

In 2022 alone, Bulgaria must adopt or amend 22 laws to receive billions from the Recovery Plan, and a bunch of other regulations must be signed for the launch of operational programs during the new programming period, under which the country can receive billions of euro. There is also a long list of necessary legal changes related to the planned adoption of the euro in 2024 and also connected to the introduction of a compensation mechanism for businesses due to high electricity prices.

If opposition MPs boycott the work of Parliament in the coming month or if Parliament is dissolved and snap elections are called following the resignation of the coalition cabinet led by Petkov on June 27, nothing of this will happen, as during the tenure of a caretaker cabinet the National Assembly does not function. The effect will be negative for the economy and will be felt even more strongly by the people amid high inflation and soaring energy prices.

Plan for The Plan

For the first time delivery on reforms is a mandatory condition for access to euro funding under the Recovery Plan, under which Bulgaria stands to receive close to 12 billion levs equivalent. The document was finally approved by the Council of the EU in early May but Bulgaria will receive nothing from Brussels until it carries out the dozens of legislative and institutional reforms set.

The example with the EU funds management act is just one of many. There is a huge list of tasks that are either at a very early stage of implementation or have not started at all. And in the absence of a regular government and functioning Parliament, there is no chance that they will be implemented within 2022.

Energy shock

Although not related to EU funds, key changes in the legal framework that Parliament must urgently adopt are in the field of energy. The tasks are in several areas: regulating the possibility of energy companies to make excessive profits; creating an automatic model for compensating businesses for extremely high electricity and gas prices; introduction of different tariffs for certain amounts of energy consumption.

If these changes are not made and Parliament is dissolved ahead of early elections, the risk is that the state will be unable to help consumers amid the continuing crisis in the sector. In recent weeks both natural gas and electricity prices have risen sharply once again.

The euro will wait

The possible dissolution of the National Assembly will make Bulgaria's target date of entering the eurozone on January 1, 2024 nearly impossible to meet. After some political tension, Bulgaria has adopted a plan that includes clear tasks for the different institutions to enable a smooth transition. The problem is that many laws have to be changed before Bulgaria adopts the euro.

There is already less than a year left to do this. Bulgaria needs to receive a convergence report with a positive opinion from the European Commission and ECB in June 2023. For this to happen, changes to the Law for the Bulgarian National Bank (BNB), and not only, must be prepared, adopted and promulgated by then.

Therefore, early elections will mean a delay of at least several months, even if they quickly produce a new stable pro-European governing majority. In the optimistic scenario, the preparation of the package of legislative changes will start in the autumn (although most of the changes in the banking legislation are to be traditionally prepared by the BNB).

However, even with institutions perfectly and purposefully working towards euro adoption, achieving the goal is still uncertain. Rapid inflation processes currently make it impossible to predict whether Bulgaria will meet the criterion of price stability in a year from now. So far, the forecasts for inflation levels in the country are above the euro area average and the reference values.

The postponement of the entry date alone will not have a strong direct impact on the economy, especially if the necessary steps are taken and work is done to improve the economic environment in the country.

Debt is not a problem for now

There is enough room in the unrevised version of the 2022 budget to issue new debt to repay government securities issues maturing this year. The nominal amount is 7.3 billion levs. Government securities worth 1.8 billion levs (921 million euro) were already placed on the domestic market in the first months of 2022. This means that a regular or caretaker cabinet can easily place a Eurobond issue of some 2.5 billion euro on international markets. Meanwhile, the ceiling of new debt issuance in 2022 was raised to 10.3 billion levs in the revised version of the budget adopted by Parliament on June 30.

The cabinet proposed to raise the limit so that it could place a bigger issue of government securities now in order to repay debt maturing in the spring of 2023. This sounds logical, as the clearly stated plans for monetary policy tightening by the Federal Reserve, the ECB and other major central banks are making government funding more expensive. This is already happening - the yield at which Bulgaria can place ten-year bonds now stands at nearly 4%. According to market experts, only a few weeks ago the yield would have been close to 3%, and at the beginning of the year it was nearly 1%, judging by the secondary trade in securities with similar maturity. Although much of the ECB's expectations of rising interest rates by the end of the year have already been calculated into the price, the risks are likely to heighten further in the coming months.