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Bulgaria Enjoys New Foreign Investment, But EU Crisis Looms

June 4, 2005

( Research Service)- Bulgarian foreign investment continued strongly with several high-profile acquisitions in recent weeks. But now that the European Union’s failed attempt at creating a constitution has affected enthusiasm for enlargement, will there be any negative results for Bulgaria?

On June 1, Telekom Austria signed a Share Purchase Agreement which gave it total ownership of Mobiltel AD. According to the Sofia News Agency, the mobile provider is valued at “up to EUR 1.6 B.” With 3.14 million subscribers, MobilTel is the largest mobile operator in Bulgaria with almost 64 percent of the subscriber market. Telekom Austria CEO Heinz Sundt acknowledged the “strategic advantage” the acquisition would give his company in Bulgaria.Until now, MobiTel had been owned by a consortium led by ABN AMRO Capital, Citigroup Investments Inc. and Communications Venture Partners Limited. But the consortium also included some of MobilTel’s existing Austrian shareholders.

The market as a whole is faring robustly. Bulgaria’s other big mobile operation, GloBul, is owned by Greece’s national company, OTE.   Its first-quarter 2005 operating income “…shows an increase by 64% on the year-ago period… the rise was mainly due to higher receipts from subscription fees, which increased by 71%.” For the same periods, GloBul profits more than doubled, from 16 million euros to 34 billion, with a 55 percent year-on-year subscriber increase.

According to the Sofia Echo, Bulgaria’s telecommunication market “…grew by 11 per cent in 2004 after Bulgarian operators expanded their range of services, and because of constantly increasing competition after the licensing of the third GSM operator.” Further, mobile services in Bulgaria “…continued to grow at the expense of the fixed-line market… The former state monopoly, the Bulgarian Telecommunication Company (BTC), lost 40 per cent of its incoming and 11 per cent of its outgoing international call traffic after the end of its monopoly of the provision of leased lines and fixed-line services.:

In another sector, global giant Coca-Cola, through its Greek subsidiary, last week announced its total acquisition of Bulgarian mineral water company Bankia. According to the Sofia News Agency, the amount Coca-Cola Hellenic Bottling Company S.A. paid for the Sofia-area Bankia “was not disclosed.”

This continuing interest comes at a time when the country’s tight fiscal policy has led to a record 345 million euro budget surplus.

But will the recent defeats of the EU Constitution in France and Holland, and the resulting atmosphere of doom and gloom gripping the union, have any effect on Bulgaria’s business climate? After giving Bulgaria the green light for 2007 accession and specifically crediting it for its painstaking reforms, the flustered Eurocrats are now worrying about the effect of the votes on their economy and taking it out on all-but-assured candidates such as Bulgaria and Romania by hypocritically backpedaling in the wake of the referendums they had thought concluded. With other countries waiting to negate the constitution, such as the Czech Republic and Denmark, the EU is grasping for any obstacle it can to appease its population’s wrath with its autocratic, endlessly expansionistic ways.

Thus, in the wake of the referendums, Enlargement Commissioner for Enlargement Olli Rehn recently stated that Bulgaria and Romania will receive “early warning letters” that “would focus on the evident current shortcomings in the reforms of both countries.” Bulgaria had been expecting to make final negotiations this fall for a 2007 entry into the European club.

Comparing the situation to a “yellow card” in football, Rehn intimated darkly his hope that “…both countries can read the political climate of Europe.” There’s no doubt about that.

According to Rehn, Bulgaria is “lagging behind” in 5 areas (most notably legal reforms and the fight against corruption and organized crime) and Romania, in 7 areas.

And, according to the British international property investment specialists Assetz International, the Bulgarian (and Turkish) property markets could be “hit hard” by the EU’s backtracking.

A company representative, Stuart Law, said on June 4 that

“…Turkey was supposed to start negotiations in October 2005 – it is clearly now in greater danger of not getting off the ground as several EU members are fully against Turkey joining. In addition Bulgaria and Romania have signed a treaty to join in 2007 but unless it is ratified by all 25 EU member states it cannot go ahead and only 2 have done so far. These two countries are suffering from corruption and other problems and the property market is a little bit ‘wild-west’ at present – if these issues are not dealt with to the satisfaction of all the EU nations then membership could be off the cards for these two countries and the property market particularly in Bulgaria could go into freefall after its early strong gains in house prices…

Investors should treat property investment in these not-yet-to-join countries as highly speculative and beware of the loose claims made by property agents for the guaranteed returns they could make – don’t put all your eggs in one basket with any kind of investment – especially property where the resale-market could dry up overnight and leave you high and dry – the three highest risk property investment areas are now Turkey, Northern Cyprus and Bulgaria.”

Regardless of the EU’s effect on the Bulgarian economy, Reuters reports that there are also fears that Bulgaria will elect a Socialist government big on public spending in the June 25th elections, thus gouging the record budget surplus.

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