Germans do have business in Bulgaria

Starting today, the largest telecoms company in Europe, Deutsche Telekom, will be listed on Sofia Stock Exchange. The operation was possible due to a mechanism – certificates of deposit – generally used the other way around: to list on developed markets companies from emerging markets.

There is a reason for the classical way this operation is made: on emerging markets, such as the ones in Central and Eastern Europe, very good companies are scattered like islands, but capital markets are not fluid enough, meaning there is no money on the stock exchange.

This mechanism short-circuits the distance between good companies and good stock exchanges, moving some shares of the respective company from the mother-country bourse on developed stock exchanges, under the form of certificates of deposit.

This time, a good company, Deutsche Telekom, goes to a bad bourse, Sofia. Why?

Because Germany is voting for Bulgaria. Ever since the Bulgarians adopted the Currency Board, in 1997, Germany has been making great efforts to obtain EU countries support for Bulgaria. And Deutsche Telekom listing on Sofia Stock Exchange is relevant for German interest in this country.

The Bulgarian state this summer rejected the $600m offer made by the OTE-KPN consortium for the National Telecommunications Company, now waiting for other bids.

One cannot rule out a connection between this business and Deutsche Telekom listing in Sofia. It is clear that the Currency Board has gained Bulgaria a different image in the eyes of Western leaders. And image draws investors, so our neighbours are faring better than we are.

Bulgaria has absorbed foreign investments worth $800m in 1999 and $1bn is the level expected for this year. Inflation is now just a bad dream, economic growth is expected to attain 4.5% this year and 5% in 2001. Problems are triggered by globalisation.

On international markets, the euro is losing ground to the dollar, so the lev is also going down, as it is pegged to the sole European currency. Moreover, the fix lev cannot cover, by devaluation, the competitiveness deficit of Bulgarian economy as compared to Western economies, so the trade deficit is widening: around $450m for the first six months of the year.

By pegging their currency to the euro, Bulgarians obtained a cut in inflation, foreign investors, “clean” economic growth and, most importantly, the image of a stable country, on its way.

As Unicredito (one of the largest Italian banks) representatives have recently said, “we have not come to Romania yet, because we don’t know where it’s heading. Bulgaria’s economy is less performing, but we prefer it because it has its own direction.

We know there’s no going back for them.” Bulgarians also obtained unemployment – and I am saying that because an economy that does not experience high unemployment rates has no chances to adjust. Official figures point to a 17% unemployment rate, while trade unions say it amounts to 25%.

As the lev is pegged to the euro, currency issues must be tied to hard currency reserves. Consequently, deficits caused by subsidising loss-making enterprises can no longer be concealed. Arrears are beginning to drop and state-owned enterprises must resort to layoffs. Restructuring is made willy-nilly.

In Romania, NBR and Government circles criticise the Currency Board solution adopted by Bulgaria. The Romanian administration thinks there are still chances for gradually cutting inflation, while the ROL/USD exchange rate will be able to absorb, by devaluation, the shocks triggered by adjustment of Romanian companies to Western competition.

In time, we shall see how profitable the two strategies are, but, from the look of it, Romania is beginning to lose ground.