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01 February 2023

Bulgaria: the Balkans' bulletproof investment destination

Business forecasts for Central and Eastern Europe got gloomier at the beginning of autumn 2022 in anticipation of a challenging winter ahead. The war in Ukraine and its consequences – sanctions against Russia, increased energy prices (mainly natural gas), broken supply chains and soaring inflation – have soured the investment climate for key players in the region. Higher costs of construction materials and rising interest rates have depressed the real estate market. Almost every conference about investment in the region starts with an ode to times gone by.

Despite the prevailing sense of caution, several international forums set out to summarise the criteria that financial institutions and investors deem necessary for a successful investment. The list included the following:

  • The target country is from the Eurozone, a member of the EU and/or NATO (the latter is relevant for American investors) and does not border a country that is at war.
  • Projects with diversified energy sources have an advantage (due to increasing electricity prices, the electricity costs of most already operating projects have reached 40 % of the agreed long-term income, and gas supplies still lack the necessary predictability).
  • Flexible local banks and terms under which they approve project financing.

How would an investment in Bulgaria be evaluated if the above criteria were applied? It may come as a surprise that Bulgaria is ticking all investors' boxes:

  • The country is not part of the Eurozone but has achieved impressive macroeconomic performance and for 25 years the official exchange rate of the Bulgarian lev (BGN) has been fixed to the euro, setting a constant official ratio of BGN 1.95583 to EUR 1 (the so-called "Currency Board"). On 10 July 2020, this rate was confirmed when the BGN was included in the Exchange Rate Mechanism (ERM II).
  • Bulgaria is a member of the EU and NATO and does not border a country that is at war.
  • Bulgaria is a regional net exporter of electricity. The main power plant (the nuclear plant in Kozloduy) is state-owned and the profits from electricity exports are used to mitigate higher energy prices. According to the EC Quarterly report on European electricity markets, Bulgaria retained its position as one of the Member States with the lowest household electricity prices. The state froze energy prices for households using July 2021 as a threshold and will cover 80 % of the cost of electricity above EUR 102 per MWh for businesses.
  • The maximum period needed to obtain financing approval by the banks in Bulgaria is about six months for developers who are not clients of the bank (i.e. the six-month period includes the banks' KYC procedure).

Or as one investor shared with a smile, "Bulgaria is not a destination for investments based on desktop analyses only. The country is the region's best kept secret." As legal experts, we expect a successful finalisation of the legal system reform and full implementation of the recovery and resilience plan, resulting in even more investment enthusiasm.

author: Elena Todorova