- Investment activity in Bulgaria has been below 20% of GDP in recent years, one of the lowest levels in the EU
- The FDI-driven growth model was shattered by the global financial crisis of 2008 and has not recovered since
- Without major reforms to attract investments, Bulgaria's economic growth is set to decelerate
New factories for vehicle components in Ruse and Stara Zagora, expansion of production capacity in Sevlievo, renewable power generators installed across the country. If one judges solely by the news headlines, they might overlook how cautious Bulgarian companies have grown when it comes to planning new ventures, expanding production or modernizing it. Apart from individual positive examples, data shows that investment activity in the country, measured through gross fixed capital formation, is in fact stagnating. In the past years, investment rates have hovered below 20% of GDP - among the lowest in the EU. As the average level in the union goes up, the share of investments in Bulgaria's economy only keeps going down.
Investments (gross fixed capital formation) in Bulgaria grew in the double digits in the years preceding the global financial crisis. After a substantial decline, though, the indicator has failed to reclaim those impressive rates. Currently, investments struggle to increase by more than 5% annually in real terms, occasionally dipping into periods of decline.
Many reasons are contributing to the modest investment activity - the COVID crisis, the war in Ukraine, the political gridlock that paralyzed the country in the past two years. Longer-term factors include a diminishing workforce, a lack of visionary investment-attracting policies, and inadequate capacity for absorbing European funding. Without ambitious reforms aimed at increasing the country's investment capacity, economic growth is set to further decelerate, the World Bank warns in a recent report on Bulgaria. This is no good news for an economy aiming to swiftly catch up with wealthier Western Europe.
Declining investment activity is becoming a structural problem for the Bulgarian economy, warns Assoc. Prof. Dimitar Zlatinov, head of the Economics Department at the Faculty of Economics and Business Administration at Sofia University St. Kliment Ohridski. This issue goes beyond just producing fewer goods and services and creating value; it also means Bulgaria can't make the necessary shift towards becoming a more digital and environmentally sustainable economy.
Current investment affairs
In 2022 the sum of all expenses incurred for the acquisition of durable tangible assets in Bulgaria totaled €14.06 billion, equivalent to approximately 16.6% of the country's GDP, according to the National Statistical Institute. Notably, the largest portion belonged to the industry sector - around €3.6 billion or 4.2-4.3% of GDP - nearly matching the combined expenditures in the trade, transport, hotel, and restaurant industries. The real estate sector saw investments of about €1.5 billion last year, while the IT and telecommunications sector, considered a high-potential growth area, attracted investments of €0.6 billion, equivalent to less than 1% of GDP.
"Such an investment structure is predominantly centered on the construction and services sectors, known for their quick profit accumulation", Zlatinov says, adding that in this situation, it's hard to even talk about catching up with or surpassing other countries' economic development.
Yet, low investments in tangible assets might as well be attributed, in part, to the relative growth of sectors that require a smaller material base. Examples include the IT industry and shared services centers, which can yield significant added value with small investments in physical assets.
The low levels of overall investments in the local economy can be attributed to the sharp decline in FDI after the global financial crisis. World Bank data reveals a drop from an average annual rate of 14.1% of GDP between 2000 and 2008 to a mere 3.2% of GDP in the period from 2010 to 2019.
The decline effectively marked the end of a model wherein the robust presence of foreign investors played a pivotal role in accelerating Bulgaria's catching up economically with the European Union and the Eurozone, analysts say.
As of 2022, foreign investments make up only 3.3% of Bulgaria's GDP, with the majority concentrated in three key sectors: processing industry, finance, and trade, as indicated by data from the Bulgarian National Bank (BNB). FDI has doubled year-on-year in nominal terms to €1.8 billion in the first half of 2023, according to preliminary data. It is yet unclear though whether this is the start of an upward trend or just a one-time increase.
The government also invests lessInvestment by the government has also declined. In contrast to the Eurozone's strategy of mitigating the pandemic's aftermath by substituting declining private investments with public ones, Bulgaria has primarily focused on social payments and significantly curtailed capital expenditures, Zlatinov explains.
Although the government's capital investment programs in recent years appeared impressive and were touted as record highs, they were primarily used as a buffer and remained largely untouched. For instance, less than half of the €4 billion investment costs planned in the general government budget in 2022 was realized, and in 2021, less than a third of the intended €6 billion investment programme was executed.
Through the investor's lens
Apart from the evident reasons for the low investment levels - the high costs and increased uncertainty caused by the pandemic and amplified by the war in Ukraine, Bulgaria faces its own systemic issues that hinder investments, such as institutional ineffectiveness and corruption. The lack of an elected government with long-term vision and commitments for nearly two years deterred foreign investors and made local ones more cautious. Now, amidst high inflation, labor costs are also rapidly rising - calendar-adjusted data from the NSI shows a 15% year-on-year increase as of the first quarter of 2023.
The latest US Department of State Investment Climate Statement on Bulgaria points out that the country is seen as an attractive destination that offers "some of the least expensive labor in the EU and low and flat corporate and income taxes". However, the country has the lowest labor productivity in the EU, and wage growth outpaces productivity, while the latter is threatened by a shrinking population and low investment in innovation.
"Investors complain about regulatory impediments, prosecutorial intervention in administrative cases, and inconsistent jurisprudence. Overall, the government's handling of investment disputes has been slow, interagency coordination is poor, and intervention at the highest political level is often required  Investors cite as major challenges Bulgaria's endemic corruption, difficulty obtaining needed permits, unpredictability due to frequent regulatory and legislative changes, sporadic attempts to negate long-term government contracts, an inefficient judicial system, and problems executing judicial judgments," the report states.
In search of new advantages
In the years following the global financial crisis, low tax rates have failed to attract sufficient foreign investments to Bulgaria and the wider Central and Eastern European region. The region is gradually losing its other key advantage - the low labor costs. Bulgaria's limited commitment to developing public-private partnerships is a contributing factor, Zlatinov points out, while factors such as the institutional environment and political stability prove to be of growing importance.
Bulgaria faces important challenges on the way to becoming an attractive place for business, whether local or foreign. These include the need for predictable legislation, real judicial reform, reduced bureaucracy, digital government services, and an education system aligned with the job market. Bulgaria's potential entry into the Schengen area and the eurozone presents new opportunities, but it won't automatically remove those challenges. Unless these local issues are tackled, the country might fail to fully capitalize on the advantages of joining these structures.