site.btaEuropean Commission: "Unstable Legal Framework, Low Trust in Judicial System Hinder Private Investment in Bulgaria"

European Commission:"Unstable Legal Framework, Low Trust in Judicial System Hinder Private Investment in Bulgaria"

Brussels, February 26 (BTA correspondent Nikolay Jeliazkov) - "Challenges persist regarding the business environment. An unstable legal framework and low trust in the judicial system hinder private investment," the European Commission writes in a report assessing Bulgaria's economy in the light of the European Commission's Annual Growth Survey 2016, published on Friday.

"Corruption remains an important concern in Bulgaria and the response of the national authorities continues to be hampered by weak and fragmented institutions. The slow implementation of reforms in the areas of public administration and e-government prevents significant improvements in the business environment. Furthermore, the outstanding weaknesses of the public procurement system limit the use of the European Structural and Investment Funds. Insufficient access to finance and lack of appropriate framework conditions for R&D investment hamper innovation and competitiveness. Delays with critical structural reforms in key sectors such as energy could further impede competitiveness," the report reads.

"Risks stemming from high corporate debt and barriers to deleveraging remain."

"Remaining weaknesses in the labour market continue to hinder growth and limit the adjustment capacity of the economy. The structural nature of long-term unemployment, a shrinking and ageing labour force, low labour market participation and skills mismatches hamper labour market adjustment, with particular impact on youth and long-term unemployed. Moreover, the persistently high share of undeclared work distorts the labour market and also reduces fiscal revenue. [Е] Outstanding challenges related to integration of Roma into the labour force, school-to-work transitions and unemployment benefits coverage hinder progress in this area," the European Commission finds.

"The performance of the financial sector as a whole has stabilised, but risks remain. Banking sector liquidity and profitability has improved, but a more robust assessment of the resilience of the sector can only be made based on the results of the upcoming asset quality review and stress test, which are expected towards late summer," the report points out.

According to the Commission, "the external position of the country as a whole has improved further but risks remain. The improvement in the net external position has been mainly driven by a structural improvement in the current account and has led to a reduction in gross external debt, mitigating risks. However, the negative level of the net external position remains rather high and the increasing financing needs of the government create some new risks."

The pension system is estimated to be on a sustainable path but almost one-half of the elderly remain at-risk-of-poverty or social exclusion, the report says. This makes labour-market reforms to support longer working lives crucial for future pension adequacy.

The high share of people living at-risk-ofpoverty or social exclusion remains a major economic and social challenge.

The Bulgarian economy has been gradually emerging from the crisis, but a broad-based recovery is not yet in sight. The necessary fiscal consolidation moderates domestic demand and still prevalent risks deter private investment despite healthy net export growth and positive labour market trends, the Commission also says.

"Given the still weak potential growth, a decline in EU fund absorption temporarily lowers GDP growth to an estimated 1.5 percent in 2016. Growth is expected to rebound to about 2 per cent in 2017 as the implementation of EU projects gathers pace once more. The crisis has more than halved Bulgaria's rate of potential growth thus halting real income convergence with peer economies.

Despite its demonstrated resilience, the financial system still harbours risks. The banking sector withstood the first phase of the financial crisis without the need for additional capital support. Overall, the banking system has managed to accumulate considerable liquidity and capital buffers, benefitting also from large interest margins. Nevertheless, cases of imprudent business practices across the entire financial sector, coupled with inefficient supervision, have created an environment for imbalances to accumulate.

"The gradual unwinding of imbalances has been insufficient to restore private investment. The external position is gradually improving but net external liabilities and gross external debt remain large, reflecting the very high external imbalances at the onset of the crisis. In addition, still high nonfinancial corporate debt, persistent negative inflation, an unsupportive business environment and serious concerns about corruption further weigh on investment and growth. Weaknesses in the insolvency framework are an obstacle to deleveraging and to new lending, further limiting the appetite for investment. These factors, coupled with the perceived risks relating to the financial sector keep the country risk premium and thus the cost of capital high in the economy. Bulgaria will require further sustained reform efforts to restore its growth potential in a way that contains macroeconomic imbalances.

Bulgaria has made some progress in addressing the 2015 country-specific recommendations. Some measures have been taken to improve the cost effectiveness of health care, including the preparation of a National Health Map. The authorities have embarked on a set of wide-ranging financial sector reforms, although challenges remain. They have amended banking sector legislation, initiated improvements in banking supervision. Work has also begun on strengthening non-banking financial sector supervision.

Labour market reforms have also progressed but an integrated approach for social groups that are marginalised in the labour market has yet to be developed.

"The Pre-school and School Education Act was adopted by the Parliament in September 2015, introducing reforms in this area. However, the non-legislative barriers to increasing the participation of disadvantaged children, in particular Roma, in preschool and primary education are not yet addressed in a consistent manner.

Improving the efficiency of insolvency procedures remains a challenge hindering banking sector reforms and dampening private investment. While legislative proposals are advancing, further steps are needed to improve the efficiency of courts in this area.

"Regarding the progress in reaching the national targets under the Europe 2020 Strategy, Bulgaria appears already to be well ahead of its targets in regard to reducing greenhouse gas emissions and increasing the share of renewable energy, and progressing well in regard to energy efficiency. More efforts will be needed to reach the targets on the employment rate, early school leaving, tertiary education, poverty, and research and development," the Commission notes.