Bulgarian business has slowed down in the past year, and some companies are even switching into reverse gear. Some factories in Bulgaria are scaling back production and laying off people, and while fears of a mass collapse are unfounded, this has caused alarm after a decade of (almost) incessant expansion. As a result, tax revenues last year were 1.2 billion levs less than planned.
This is the general picture, according to the first reports for 2023 published by public companies listed on the stock exchange last week, data from the Employment Agency and data from the Ministry of Finance on the implementation of the 2023 state budget.
They are the leading indicators of what is happening in the economy, both on the micro and macro levels, and coincide with expectations of GDP growth slowing to 1.8% this year. In 2022, Bulgarian businesses were able to overcome the negative factors of the war in Ukraine and global uncertainty, but in 2023 these factors, combined with high inflation and slowing consumer demand, are already impacting financial and production performance, as well as state earnings.
In slow motion: What the first stock market reports show for 2023
Most Bulgarian companies' activity is highly dependent on European markets, and they ground to a halt last year. Just a few days ago it became clear that the eurozone has escaped the recession - this happened thanks to the faster recovery of countries like Spain and Italy, while the largest economy - Germany, shrank by 0.3%. The country is Bulgaria's largest trading partner in the EU.
Of the 23 companies whose accounts Capital tracked, only nine had revenue growth, with three of them in single digits. The sample now includes losses as well as declining profits. So far, the technology sector ("Shelley Group") and pharmaceuticals are showing greater resilience, but they operate in a fairly regulated sector, with flows guaranteed by input from the national health fund.
Take aluminum products manufacturer Alcomet - one of the largest public companies by revenue. Last year, it fell by almost 40%, which reflects what is happening in foreign markets. The weaker economic growth abroad, inflation and other externalities have led to depressed demand, high inventories and reduction in new orders, its report says. As a result, sales of the company, whose main markets are Germany, Poland and Italy, fell to just over 437 million levs, resulting in a net loss after making one of its biggest ever profits a year earlier. Other companies that are close to metals and are in the engineering sector are also under pressure from slowing external demand.
Construction and pharmaceuticals - winners and losers
The property boom in Bulgaria may give the impression that construction will grow forever. The situation abroad, however, portends other trends that may be transferred to our country. This can be read through the report of the radiator manufacturer Corado. Its revenues fell by more than 30%, but the company, which has Czech owners, managed to limit the decline in profits, which remained at just under 4 million levs. Apparently, the slowdown in the construction industry has had an impact on the results of cable manufacturer EMKA as well as Toplivo, which sells building materials and fuels.
The pharmaceutical sector is showing mixed signals, but the largest company among the exchange representatives shows that the trend is still up. Sopharma Trading is growing by almost 16% and its profit is doubling. Data from the earnings report shows that the biggest contributors to revenue growth are the pharmacy and hospital markets. Etropal, which manufactures dialysis devices, blood lines, needles and other medical products, is growing at double the rate, with the company breaking even. Clearly, the medical market, where billions are allocated and spent in Bulgaria, provides good conditions for growth, but not for all firms.
Controlled cooldown in the industry
Mass layoffs, shutdowns, plant closures. The picture that has emerged in the public consciousness alongside several high-profile cases in recent months looks rather bleak. Despite the undeniable problems, the situation is far from apocalyptic. This is confirmed by the Employment Agency's data, which shows that in the second half of 2023, fewer companies have submitted notifications for mass redundancies than in the same period of 2022. There were also nearly 600 fewer employees threatened with being made redundant.
However, even those made redundant are unlikely to remain on the market for long, given the industry's persistent hunger for people. Although the companies' cases are different, the general trend is clear: Bulgaria will become increasingly unattractive for low-cost manufacturing, so both existing and new investors will turn to other destinations. However, there is room for more sophisticated products and more skilled workers.
For example, the reports that Sanmina's electronic components plant near Plovdiv was closing proved to be greatly exaggerated - despite personnel cuts of about 200 people, the firm did not fire all 430 employees it had warned the Employment Agency about. According to a Capital source, the company has lost its only customer and is currently in the process of restructuring and shifting production to circuit board printing.
According to Employment Agency information, there will be bigger cuts at the bicycle manufacturers Leader - 96, its subsidiary E-velox and Maxcom. This is not a surprise, after a strong post-Covid recovery and a decreased demand in European markets. "End customers in Europe have stopped buying - not just bicycles, but non-food goods in general," says Leader - 96 director Dimitar Zlatanov.
However, some firms have different types of problems - luxury packaging manufacturer Darmax in Pernik has ceased its main activity and about 20 people have been laid off, but not due to weak demand. "There is no problem with the market, the problem is with the workforce," owner and manager Evelina Georgieva told Capital. Because of the lack of workers, the company has not been able to meet the volumes demanded by customers and has had to stop operations. Manufacturing firms like Festo are also cutting down staff so that they can recruit specialists who are also expected to have enhanced skills that would fit the company's restructuring.
Effect on the state coffer
These industrial fluctuations are, logically, affecting tax collection. According to the preliminary report of the Ministry of Finance on the implementation of the 2023 budget, the tax revenues last year were 1.2 billion levs less than planned. The main underperformance was in VAT revenues from imports and corporate taxes. By contrast, a record 11.58 billion levs were spent in the last month of the year, or double the average for each of the other months of the year.
Thus, the end result at the end of December amounted to a deficit of 2.2% of GDP according to the European methodology (an important indicator for the euro) and 2.9% on a cash basis. Budget 2023 was planned at a minus of 2.5% on a cash basis and 3% on an accruals basis. That is, on a cash basis, the deficit is higher than budgeted by about a billion, but the outcome for euro area purposes is better.
In any case, GDP growth in Bulgaria is expected to accelerate this year, which may be reflected in the business and budget results. Economists also expect the eurozone economy to pick up slightly this year as falling inflation and continued wage growth boost consumer spending power. Another reason to be more optimistic.
Bulgarian business has slowed down in the past year, and some companies are even switching into reverse gear. Some factories in Bulgaria are scaling back production and laying off people, and while fears of a mass collapse are unfounded, this has caused alarm after a decade of (almost) incessant expansion. As a result, tax revenues last year were 1.2 billion levs less than planned.
This is the general picture, according to the first reports for 2023 published by public companies listed on the stock exchange last week, data from the Employment Agency and data from the Ministry of Finance on the implementation of the 2023 state budget.
