Introduction
Business prospects in an economy are dependent on various factors that affect its operations and performance. In this consideration, economic and monetary environment plays a key role in shaping an economy’s attractiveness and ability to sustain business’ operations as well as suitable performance. Therefore analyzing a country for its suitability as a venture market requires a broad analysis of the factors and this defines the objective of this analysis. (Barron & Lynch, 1989) To achieve that, the analysis explains the economic environment by evaluating the economic system, economic development, main products and services as well as defining the prevalent economic risks. In addition the analysis explains the exchange rate system in the country identifying the underlying currency risks.
Analysis
- Economic environment
Economic system
Bulgaria’s economy is marked by a market economy where the market forces determine resources allocation, economic operations and production. However, the economy has a significant public sector and a relatively small private sector that is highly reliant on industrial operations but gradually growing its service sector operations. In addition the economy operates under the free trade system where flow of goods and services is also determined by market forces. (Ministry of Finance, 2013)
Some of the key measures and indicators of the economic system include GDP growth, inflation rate as well as unemployment. In respect to GDP growth, the country has a 1.7% rate marking a positive growth but which is relatively low compared to the other European economies. The economy has an unemployment rate of 4.2% and an inflation rate of 4.25%. (Emilia, 2011)
Economic development
Economic development is a result of continued economic growth over a significant period of time defined by infrastructures’ establishment. With a population of slightly above 7 million people, $90.51 Billion in GDP and a GDP per capita of $12,600 by the 2009 estimates, Bulgaria is described as an upper middle income economy by World Bank’s standard with significant developments in industrial, construction and retail industries. (Ministry of Finance, 2013) However, the country’s growth has continuously declined from the 2008’s $95 Billion to a GDP of 53.5 Billion in 2011 and is now way be hide its peers in development despite having a past continued growth of 6% for the period between 1996 and 2008 as it was highly dependent on foreign direct investments. In addition, the economy is one of those that were hard hit by the 2008 recession negatively affecting its growth to 1.7% GDP growth by 2011. (Emilia, 2011)
Main products and services
Products and services that mark an economy’s market are reliant on the country’s industries which in turn depends on various factors including sectors’ specific attractions to investors, available resources, level of economic development, technology advance and transfer as well as market demand. In this respect, the Bulgarian market is marked by major industries and sectors including mining and minerals, energy, IT and software, food, transport and tourism sectors which define the products and services in the market. (Nenovsky, 2009)
- Mining is a key sector in the country with coal and copper being major export products in whose production the country ranks position 19 globally. In addition, the country ranks position nine globally in production of bismuth.
- Energy sector has in the past highly relied on imported oil and gas as well as electricity, however, the country is increasingly engaging in establishment of infrastructure necessary to deliver not only locally sourced energy but also clean energy in terms of wind power and renewable energy all of which have prospects for good returns on investments.
- Information technology and software marks a key service sector in the economy with the country ranking position three globally for per capita Certified IT professionals.
- Food industry forms another crucial sector in the economy with its key products and services including tobacco and wine as well as food processing. (Nenovsky, 2009)
- Transport in Bulgaria is marked by key motorways that transverse the country providing excellent opportunities for investors interested in the transport sector. The key transport means include; rail, road, air and shipping.
- Tourism sector is also significant to the country that enjoys numerous attractions including its over 30 museums, historical epoch’s marks in over 30,000 monument sites as well as about 600 cold, hot and warm mineral springs. In addition, the country’s moderate continental climate and excellent location makes it a key market for tourism services. (CIA, 2013)
Economic risk
Economic risks of a country are defined by various factors that define its economic status. Therefore, a deterioration of the status caused by a negative trend in the measures is the greatest reflection of the risks involved. In addition, some economic programs and policies are sources of economic risks to a business. In that respect, unemployment, inflation, economic growth, FDI policies as well as free trade programs defines the economic risks rife in Bulgaria as discussed below. (Barron & Lynch, 1989)
- Increasing unemployment in Bulgaria could have an implication of reducing the aggregate disposable income which eventually translates to low demand for goods and services
- Increasing inflation in the country reduces the purchasing power of the customers and it also reduces their returns on investments.
- Declining economic growth is a reflection of low economic activity as well as low aggregate demand or supply in an economy. Thus, the declining GDP growth presents risks to investments.
- Free trade policies and programs supported by the economic system in the country is a source of increased business competition with multinationals having the opportunity to avail their products in the market.
- Increasing competition in the market with economic programs that support Foreign Direct Investments presents a risk to businesses. (Ministry of Finance, 2013)
- Monetary environment
Exchange rate system
An exchange rate system is basically the method that is used in an economy to determine the country’s currency value relative to the other currencies. The most prominent exchange rate systems are flexible and fixed regimes in which the currency’s value relative to the others is determined by market forces and government intervention respectively. (Barron & Lynch, 1989) However, after experiencing massive economic and monetary crisis, Bulgaria dropped the orthodox fixed exchange rate regime and adopted a regime that was new to economics and monetary systems at the time by adopting a new form of the currency board system in 1997. This was on merit of the peculiarity of the situation that the country was in hence a need for a self tailored system to effectively address the problems. (Emilia, 2011)
A typical currency board system is a system in which the function of determining the exchange rate is independent of the market forces and from the central bank’s functions. Thus, the system is independently run by a board appointed by clear policies which are embedded in the countries monetary policies and laws defining a long-term commitment in terms of a fixed exchange rate with anchoring to a specific currency of choice that is 100% backed by the anchor currency reserves. In this respect, the rate and the commitment are defined in the laws and take a long-term perspective without the possibility of being adjusted in short-run unlike in the fixed regime where central banks can willingly adjust the rate depending on the country’s economic status and needs. The core purpose of adopting this system was to have a system that could not be prone to the short run fluctuations in inflation and banking crisis like had been experienced in the country where the banking and economic crisis ensued into a massive monetary problem hampering currency’s operations and value. (Adam & Cobham, 2007)
Currency risk
Despite the introducing the new exchange rate regime, and the fact that the economy has eased exchange rate risks and protected itself from the unexpected exchange rate fluctuations which could have had significant positive or a negative effect on business operations, there lies a number of currency risks owing to some of the systems limitations and dynamic nature of economic and monetary factors. Some of the risks rife in the Bulgarian economy are as discussed below.
- Adjustment problem presents a currency risk in that there is no possibility of adjusting the country’s exchange rate in response to economic changes.
- Transition risk is rife with consideration that there would have to be a complete change of monetary policy laws in order to change the exchange rate. This subjects the key economic indicator’s fate to the willingness of the political regimes in the country.
- The country risks losing any benefit that accrues in terms of a currency appreciation as the country’s economy grows. With a long run fixed rate, it would not be possible for Bulgaria to draw any economic gain that would have reflected in appreciation of its currency.
- External shocks in the anchor currency’s economy risks having a negative effect on the real value of the Bulgarian currency in the international market. This is in consideration that deterioration in the value of the anchor currency would not be reflected by the exchange rate adjustment hence determining the fate of the Bulgarian currency in the international arena.
- The system puts limitations to the functions of the Bulgarian central bank and monetary policy in that they cannot adjust foreign reserves according to the economy’s demand as it is fixed at a 100% against the local currency hence difficulty in coordinating its international monetary relations. (Dobrinsky, 2000)
Conclusion
The analysis shows Bulgarian economy as a less developed economy that experienced an impressive growth in the past but which was hampered by massive economic and monetary crisis. The past crisis which faced the economy prior to 1997 coupled with the 2008 recession left the economy’s status with declining growth. However, the young nature of its industries and service sector presents opportunities for growth while the new currency board regime works to mitigate against exchange rate fluctuations that could have a negative impact on the economy like it has in the past. Therefore, it can be concluded that the economic and monetary environment in the country presents a case of balanced opportunities and risks for any investor.
References
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CIA. (2013). World Fact-book: Bulgaria. Retrieved from,
https://www.cia.gov/library/publications/the-world-factbook/geos/bu.html
Dobrinsky, R. (2000). The transition crisis in Bulgaria. Cambridge Journal of Economics,
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Emilia, P. (2011). Trade, Convergence and Exchange Rate Regime: Evidence from Bulgaria and
Romania. Bulgarian National Bank Discussion Papers, DP/85/2011. Retrieved from, http://www.bnb.bg/bnbweb/groups/public/documents/bnb_publication/discussion_2011_85_en.pdf
Ministry of Finance. (2013). Republic of Bulgaria: Macroeconomics environment and
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