Under Bulgaria’s former tri-party coalition (2005-2009), Bulgaria joined the EU. Up to 2009, the country enjoyed increasing GDP growth and higher employment, but since Q4, 2008, it has been severely affected by the global financial meltdown. The latest parliamentary elections (July, 2009) were won by the centre-right Citizens for European Development of Bulgaria (GERB), led by Boyko Borisov. We do not forecast business risks related to the political environment. The new Bulgarian Constitution (1991), embraced the principle of free entrepreneurship.
Since then, the legislation has been steadily developing towards enhanced business framework. In compliance with EU, regulations’ rules for environmental protection, and most recently, for animal care, were adopted. These include the Veterinarian Activity Act (2006), which established requirements for pet’s registration, home and medical care, and also the Animal Protection Act (2008), which regulates the protection of life, health and well-being of animals. Further, the Animal Protection Act establishes requirements for at-home dog-care. A regulation regaring dog training was adopted in early 2009.
Effective since July 2009, is a regulation on facilities for pet boarding. This regulation defines pets’ basic living conditions and sets rules regarding licensing of dog-boarding facilities, their design, staff, etc. The regulation watchdog is the National Veterinarian Service. Regulation/de-regulation trends With the recent election of a right-oriented government, we expect lowering of some admistrative barriers for business establishment. The new government stands firmly behind the currency board arrangement (CBA) until the adoption of the EUR.
Hence, our model assumption for fixed FX rate is sound. Stage of the business cycle: In the absence of a new severe negative international shock and/or a serious domestic policy mistake Bulgarian economy will resume its upward GDP growth by end-2010. Currently, the economy is in recession with expected annual drop of -6% by end-2009. However, as each recession hits mainly the average income bracket, we envisage that our premium-based business segment (above-average income dog owners) would not be severely affected.
Industrial Production: Similar to other CEE countries, the real estate buble have been financed predominantly from abroad. Unfortunately, since the peak in Q2, 2008, FDIs are constantly falling down and, as a result, industrial production index has been steadily declining (Figure 1). Even so, it does not impose a threat on our business. Inflation: Bulgaria faced an inflation peak (15. 3%) in mid-2008, under the skyrocketing pricing of real estates. In the following quarters the confidence in the economy started to decline, as the economy was affected by the worldwide financial crisis and liquidity shortage.
In the assumptions, we ensisage a moderate inflationaly enrioment of 6% p. a. Unemployment: In 2008, unemployment fell to 6. 3% — the lowest rate since early nineties, mainly due to GDP growth and positive expectations of the country’s EU accession. The real growth in the construction sector, tourism and services has the biggest contribution in the employment. However, due to the economic slowdown in EU countries, the unemployment rate is set to rise, in late 2009 and yearly 2010.
Short-term interest rates: Based on the above, Bulgaria started to experience negative FDI since Q3, 2008, initially provoked by massive flow out of the real estate sector. Simultaneously, locally operating branches of foreign banks started to reassess their country risk pricing/positions and to cease lending. In Figure: 4, we depicted the dynamics of the difference (spread) between the 3M SOFIBOR and the 3M EURIBOR. It shows how expensive (higher spread – risky) is lending between banks in local currency, compared to EU.
The spread has widened to 4. 71% in June 2009. Recently, the spreads started to tighten on the basis of huge liquidity that foreign central banks were pouring into the banking system. It is expected the negative tendency to stop evolving. However, our price of capital is aligned with the latest interest rate statistics. Credit Default Swap: The new circumstances impacted the CDS (Credit Default Swap), a measure that represents the risk associated with the ability of the sovereign to repay its long term obligations, mainly in the form of bonds.
It is used (traded) by market participants, possessing assets in the form of bonds as an insurance against default of payments of the respective sovereign. According to Figure 5, there was an increased concern over the economy of how the government and the business will tackle the problems related to the high indebtedness of the private sector, provided that current account deficit is increasing and the global economy is heading south, as the demand slumps to a record low levels.