Bulgaria is continuing transformation towards market-driven
economy in a rather strained environment - huge foreign debt
burden, sustained losses due to the Gulf War and the UN embargo
against Serbia and Montenegro. The establishment of private
property and market-oriented legislation, and the ongoing law
reform aim at promoting private sector expansion and removing
restrictions to foreign capital inflow.
In 1992 the National Assembly passed the Law on the
Transformation and Privatization of State-Owned and Municipal
Enterprises and the Law on Economic Activity of Foreign Persons and
Protection of Foreign Investment. These acts present possibilities
for privatization through foreign investment. In November an
agreement in principle with the London Club creditor banks for
restructuring Bulgariaвs external debt was reached, followed by
further negotiations defining the size of the eligible foreign debt
and the proportions among the instruments of the Brady-type menu.
The agreement reached stipulates a provision for an exchange of
some of the instruments of Bulgaria's external debt into equity.
Nevertheless the fact that debt-equity swaps are not an option in
the menu, the possibility for such transactions is provided by two
of the instruments. This is an unique chance for speeding up
privatization and attracting foreign capital together with foreign
debt reduction. The finalization of the deal is a necessary
condition for gaining back creditors faith which is an
indispensable element for attracting inward foreign capital and the
overall success of the reforms.
This following discussion is organized as follows: Part One
presents a brief overview of the past few years of the reforms, the
economic policies that have been followed and results achieved.
This discussion serve to contextualize the economic environment in
which DES schemes as an useful tool of the entire debt management
will take place.
In Part Two is presented an exposition of the considerations
regarding privatization through foreign investment. Attractive
opportunities for inflow of foreign capital through debt-equity
financing are provided by a profitable investment climate.
Bulgarian economy is appealing to foreign capital inflow because of
the advantages of its legislation, good economic basis and the
subsidized price at which local enterprises will be acquired. On
this basis the paper examines the conditions under which particular
benefits will accrue to the foreign investor as a party in the
In Part Three is made an impact assessment of DESs on Bulgaria
as a debtor country. In these descriptions the analysis focus on
the short- and long-term negative and positive domestic and
external aspects: pressure on monetary base, improvement in the
current account and balance of payments, promotion of foreign
direct investment (FDI), debt and debt service reduction as well as
speed up of privatization. It is the central objective of this
paper to describe and analyze the costs and benefits of applying
DESs in Bulgaria as a debt troubled country and the impact of
debt-equity financing on its economy.
The final part provides a summary of the arguments raised in the
body of the paper.