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Spending your way out of the crisis? For Bulgaria it may not be an option



Getting to know Bulgaria’s “Fiscal Reserve”

Recently, Bulgarian commentators and policymakers have been whispering on the status of the “Fiscal Reserve”. This financial instrument is amongst the main indicators of Bulgaria’s economic stability. It is also a source the government draws from to finance extraordinary expenses without recurring to debt. Given the reserves’ importance, it is unsurprising that some wonder whether the government is wasting precious resources now and then.

It is important to notice that Bulgaria’s fiscal reserve is actually an aggregate indicator which includes heterogenous sorts of components. Such a detail is actually essential because the government cannot earmark all of these resources freely for current expenditure. Thus, doubts relating to the fiscal reserve regard not just its level, but also its composition. To get a clearer picture, one may simply say that there are three main categories of assets in the fiscal reserve. First, budgetary institutions’ bank-account balances — which make up the lion share of the total. Second, the ‘Silver Fund’, a reservoir of assets meant to ensure the pension system’s sustainability, which is also quite significant. Finally, accounts receivable from European Union funds for certified expenses and advances, which have been rising steadily. On average, in 2019–2021 these three sources have provided the fiscal reserve with 99% of its value (Figure 1).

Lack of transparency contributes to make the issue even murkier. Publicly available information on the state and composition of Bulgaria’s fiscal reserve are rather incomplete. In fact, the Ministry of Finance only discloses the reserve’s total and a few other data on a monthly basis. Not even the ministry’s quarterly report on the fiscal reserve provides a better breakdown. Meanwhile, the issuance department of the Bulgarian National Bank (BNB) declares only total deposits weekly. Thus, worries on the status of the fiscal reserve appear justified overall.

More extraordinary expenses ahead

Like many other developed countries, Bulgaria has faced widening fiscal deficit due to the pandemic-induced crisis over the past year. The fiscal reserve’s erosion is the unavoidable result of reduced revenues’ and increases spending’s combined effect. Such a downward trend has led many to question public finances’ soundness and the government’s ability to manage the reserve. Moreover, as a caretaker cabinet replaced the previous executive after inconclusive elections scrutiny has intensified in May–June 2021.

In the next few months, the country has to face enormous expenses. This money is going to finance a €25 increase of all pensions as well as employment-support schemes. True, the government has foreseen a 4.9bln-leva deficit (ca. €2.5bln or $3bln) in the current fiscal year. However, is will probably not suffice to cover the cost of these and other measures, estimated at over €4.5bln. Actually, the very fiscal reserve from which the cabinet may want to draw may not be enough.

In fact, according to the latest available data, the Silver Fund sits at just a little over €1.7bln. Meanwhile, budgetary entities’ deposit with the BNB are somewhere in the realm of €3bln. Hence, despite the imminent collection of several taxes, the reserve would have to decrease drastically — something Bulgaria cannot afford. The only other option, is for the caretaker cabinet to finally manage to draft a revision of the budget. Yet, even in this case, there is no guarantee that after the elections in July the new parliament will pass it.

And the Fiscal Reserve keeps eroding

In the meantime, the size of the fiscal reserve keeps shrinking. Usually, its levels follow a sinusoidal trend, with periodical rises and falls. However, in the course of late 2020 and early 2021 revenues have systematically been insufficient to cover for past expenses. As such, each successive withdrawal has reduced the reserves’ total value incrementally. This divergence from established patterns is clearly visible in Figure 2, which disaggregates the fiscal reserve’s three main components.

As of May 2021, the fiscal reserve’s worth was €4.5 billion, as opposed to €5.2bln in May 2020 (Figure 2). In the short term, it had already gone down by €400mln, from €4.9bln in January of that year. Hence, the reserve shrunk twice as fast in January–May 2020 (-8.7%) than in the same period of 2021 (-4.2%).  Simeon Djankov, deputy Prime Minister and Finance Minister in 2009–2013, argued already in mid-March that the government will have to withdrawal several further billion from the fiscal reserve. Similarly, Milen Velchev, finance minister in 2001–2005, argues that a new budget allow more borrowing is a priority.

Yet, the ousted prime minister’s party (GERB) is strenuously defending its financial track record and claiming their budget is sufficiently effective. Kiril Ananiev, former Finance Minister, noted that despite the deficit already high deficit, the fiscal reserve is still double its legal minimum. GERB’s leadership are argues that this is the worst state the reserve has ever been in. After all, in 2014 the fiscal reserve was worth only €2.6bln or 10% of GDP “without pandemic or extraordinary expenses”.  Meanwhile, now reserves amount at 4.6% of GDP. Moreover, the reserve is on a deficit in the first quarter of 2021 for the first time.

Causes of a decline

As mentioned above, the official data on the fiscal reserve’s status tend to be rather fuzzy. But the Institute for Market Economy (IPI), one of the oldest Bulgarian think tanks, obtained disaggregated data for 2019-2021. These figures shed an interesting light on the interactions between fiscal policy and a stable fiscal reserve (Figure 3).

By February 28 2021, budgetary entities had about €2.7bln, €409mln of which destined to social security funds and EU-sponsored projects. In addition, the budget for 2021 earmarks €1.6bln for the Silver Fund; the least ‘liquid’ of the fiscal reserve’s three main components. As a result, there are just about €1.1bln available for discretionary spending. To get an idea, the current pension- and salary-support schemes have a combined cost of almost €110mln per month.

At their historical low-point, on August 31 2010, those accounts held €320mln, so the current situation is far from bleak. Yet, changes in the relative weight on the reserve’s total of its the three main components indicate several risks. As regards EU funds, they are rather stable in their absolute amount over the period January 2019–May 2021 (Figure 3). Generally, they fluctuate somewhere in the realm of €1.7–2.2 billion, averaging just under the €2bln mark. Nevertheless, their relative importance is usually quite unpredictable, and in steep rise since September 2020 (Figure 4). The same can be said of the Silver found, the value of which stands around €1bln. But excluding social-security funds, budgetary balances are at their lowest level for the entire period under review. Thus, their relative importance has decreased, making EU financing, pension funds and the Silver Fund significantly more important than before.

The peril ahead: Nationalising social-security funds

The danger could hardly be more evident. Without considerable free resources, the government will need to find new resources to finance any additional expense. Two are the main tools that would allow to replenish the reserve. First, generalised or target tax hikes may be sufficient on their own, or in combination with other tactics. However, they are out of question in this electoral period. Second, debt raised amongst domestic and international investors could be signed at relatively low interest rates. Yet, the current budget allows for no more than €2.3 billion of new-emission debt, which are unlikely to suffice.

Finally, the cabinet may repeat the script played out to save the reserve from its 2010 low. Back then, the government proposed the nationalisation of the National Health Insurance Fundj (NZOK). Since the parliament approved it, the State budget can draw freely on the billions in the NZOK’s balance. This time, nationalisers may eye the nationalisation Silver Fund – which also sustains social security – as the solution.  Thus, they may amend the law destining assets in the Silver Fund to their current purpose to be able to finance urgent expenses. This would put high pressure on Bulgaria’s social security system and, potentially, expose present and future retirees to the risk of losing their hard-earned pensions.

Fabio A. Telarico was born in Naples, Southern Italy. Since 2018 he has been publishing on websites and magazines about the culture, society and politics of South Eastern Europe and the former USSR in Italian, English, Bulgarian and French. As of 2021, he has edited two volumes and is the author of contributions in collective works. He combines his activity as author and researcher with that of regular participant to international conferences on Europe’s periphery, Russia and everything in between. For more information, visit the Author’s website (in English and Bulgarian).

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Finding Fulcrum to Move the World Economics



Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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Evergrande Crisis and the Global Economy



China’s crackdown on the tech giants was not much of a surprise. Sure, the communist regime allowed the colossus entities like Alibaba Group to innovate and prosper for years. Yet, the government control over the markets was never concealed. In fact, China’s active intervention in the forex market to deliberately devalue Yuan was frequently contested around the world. Ironically, now the world awaits government intervention as a global liquidity crisis seems impending. The Evergrande Group, China’s largest property developer, is on the brink of collapse. Mounding debt, unfinished properties, and subsequent public pressure eventually pushed the group to openly admit its financial turmoil last week. Subsequently, Evergrande’s shares plunged as much as 19% to more than 11-year lows. While many anticipate a thorough financial restructuring in the forthcoming months, the global debt markets face a broader financial contagion – as long as China deliberates on its plan of action.

The financial trouble of the conglomerate became apparent when President Xi Jinping stressed upon controlled corporate debt levels in his ongoing drive to reign China’s corporate behemoths. It is estimated that the Evergrande Group currently owes $305 billion in outstanding debt; payments on its offshore bonds due this week. With new channels of debt ceased throughout the Mainland, repayment seems doubtful despite reassurances from the company officials. The broader cause of worry, however, is the impact of a default; which seems highly likely under current circumstances.

The residential property market and the real estate market control roughly 20% and 30% of China’s nominal GDP respectively. A default could destabilize the already slowing Chinese economy. Yet that’s half the truth. In reality, the failure of a ‘too big to fail’ company could bleed into other sectors as well. And while China could let the company fail to set a precedent, the spillover could devastate the financial stability hard-earned after a strenuous battle against the pandemic. Recent data shows that with the outbreak of the delta variant, the demand pressure in China has significantly cooled down while the energy prices are through the roof. Coupled with the regulatory crackdown rapidly pervading uncertainty, a debt crisis could further push the economy into a recession: a detrimental end to China’s aspirations to attract global investors.

The real question, therefore, is not about China’s willingness to bail out the company. Too much is at stake. The primal question is regarding the modus operandi which could be adopted by China to upend instability.

Naturally, the influence of China’s woes parallels its effect on the global economy. A possible liquidity crisis and the opaque measures of the government combined are already affecting the global markets: particularly the United States. The Dow Jones Industrial Average (DJIA) posted a dismal end to Monday’s trading session: declining by more than 600 points. The 10-year Treasury yields slipped down 6.4 basis points to 1.297% as investors sought safety amid uncertainty. The concern is regarding China’s route to solve the issue and the timeline it would adopt. While the markets across Europe and Asia are optimistic about a partial settlement of debt payments, a take over from state-owned enterprises could further drive uncertainty; majorly regarding the pay schedule of western bondholders amid political hostility.

Economists believe that, while a financial crisis doesn’t seem like a plausible threat, a delayed response or a clumsy reaction could permeate volatility in the capital markets globally. Furthermore, a default or a takeover would almost certainly pull down China’s economy. While the US has already turned stringent over Chinese IPOs recently, a debt default could puncture the economic viability of a wide array of Chinese companies around the world. And thus, while the global banking system is not at an immediate threat of a Lehman catastrophe, Evergrande’s bankruptcy would, nonetheless, erode both the domestic and the global housing market. Moreover, it would further dent Chinese imports (and seriously damage regional exchequers), and would ultimately put a damper on global economic recovery from the pandemic.

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Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage



The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.

The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.

The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.

According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.

Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.

While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.

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