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Over the past week, with the support of the IME, the Sofia Municipal Agency for Privatization and Investment analysed the impacts of the coronavirus pandemic on the Bulgarian capital’s economy. They extended their analysis to include potential measures to remedy those impacts. Here we present the most important conclusions concerning the economic aspect of the analysis and provide additional comments.  

Sofia’s reaction to the crisis is notably distinct from that of the rest of Bulgaria, owed to the capital’s economy being significantly different from that of other municipalities. In general terms, Sofia’s economy outperforms others in the size of its service sector, which comes at the expense of having a less developed manufacturing and agriculture sector. It is also worth considering tourism, which, despite being one of the presently growing sectors, is not a crucial player in the capital’s economy. Similarly, the economic dominance of the capital is determined by the large share of trade present in the total volume of its economy, which is not particularly affected.

In 2019, Sofia was hitting various labour market records. According to the latest data, employment rates of the capital’s working age population exceeded 78%, and unemployment rates had fallen to 1.6% (a little over 11,000 unemployed in population terms). However, with the inevitable economic contraction experienced by Sofia at the start of 2020, it appears that such labor records are matters of the past. Initial analyses by the IME reveal that about 86,000 employees, comprising over 10% of the labour force, were severely hit by the crisis. This figure includes 35,000 people within the almost completely inactive hospitality sector – mainly hotels and restaurants – and 10,000 within the cultural sector, comprised mainly of cultural and sport activities.

Undoubtedly, the most affected branch of the capital's economy is tourism. Although, it is a rather small branch - according to the latest calculations, it accounts for about 2.5% of the capital's economy, measured by value added. The negative impacts on the sector, namely the dramatic decrease in manifest themselves along two dimensions: the shrinking income of potential tourists and their increased fear of travel. Tourist associations’ forecasts, as quoted by SOAPI, set the maximum potential losses for the economy of Sofia, in case of a long-term quarantine, at over BGN 175 million. An additional adversity is created by the fact that a large portion of employees of the tourism sector are lower-skilled and lower-educated, which impedes their potential re-assimilation into sectors outside tourism. When assessing the risks for the tourism sector, it is important to remember that Sofia hosts the biggest international airport in Bulgaria, which will be seeing less and less traffic passing through. 

Trade is the largest sector of the capital's economy, forming almost one fourth of its entire volume, and employing 180,000 people. At this stage, the impacts on the retail aspect of trade, namely dealing with sales of food and drinks, seem to be relatively weak; anecdotal evidence show that, against the background of the transition of many companies to remote work, sales of equipment were also not heavily impacted. Conversely, we have every reason to expect a decline in trade of luxury goods (and many non-food products) in the near future. It is also worth noting the change in the sales model of many retail firms – evidence points to an increased demand for online purchases, and accordingly - a significant increase in sales of companies that use this business model, especially in food. This rings especially true for Sofia, as it has the highest Internet penetration in the country and the highest density of providers.

The flexibility of Sofia’s economy is owed largely to adequately developed ICT sector, as well as to outsourcing of services; put together, their weight in the capital's economy is up to par with that of the trade sector. Against the background of limited social contacts and depleted mobility, this sector is most easily able to move to a model of remote work and to resume its functions. The risks to which these sectors are exposed stem mainly from the potential decline in software orders amid the global economic crisis, in tandem with the fact that the ICT and outsourcing sectors in Sofia operate almost exclusively by exports, making them particularly vulnerable to economic shocks in Western Europe and USA.

While the picture painted so far may not appear all bad, it is worth noting that freelance professions, which account for a significant portion of the capital’s economy, are exposed to significant risks. They include a range of business and technical services, from lawyers and notaries to architects and business appraisers. The suspension of transactions, and more generally the expected medium-term contraction of new investment initiatives, will exert relatively strong downward pressure on the demand for such services. The same goes for the media and advertising sectors, as advertising budgets are subject to the first cuts in the event of a "belt-tightening" approach by businesses.

It is harder to predict the impacts on sectors such as manufacturing, given that their operations depend more on the severity of measures to limit the spread of the virus; for example, tightening of measure to constitute to full quarantine will make the work of the sector virtually impossible. The same applies to the construction sector to a certain extent – while ongoing construction projects are being completed, a delay of new construction projects, as well as relevant repair activities as a result of postponed investments, can be expected.

An important advantage of the capital’s economy is the relatively high capacity of its labour market to accommodate for and take on new unemployed and to account for many emerging vacancies. Predicting how many vacancies will decorate the labour market in a post-pandemic Bulgaira, as well as how many of them will be filled, is purely speculative work. However, until recently, the capital's labour market managed to integrate virtually all workers with relevant education and skills, and its ability to continue to do so will play a key part in Sofia’s post-crisis recovery.

In summary, thanks to the developed sectors within the capital’s economy, namely the services sector, the ICT sector and the trade sector, Sofia fosters high flexibility and is better prepared to face the inevitable blow delivered by the coronavirus pandemic and any resultant restrictive measures. However, this does not mean that the damage, especially in the short term, will not be significant.

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The English translation will be available soon.

One of the main focuses of IME’s latest Regional profiles is the observation that the periphery of the big economic centres in the country is moving ahead. The Sofia district, which houses both the industrial zones of the city - for example, Bozhurishte and Kostinbrod, as well as part of the heavy industry in the Srednogorie region - such as Pirdop and Chelopech, is already catching up with the capital both in terms of employment and per capita production. That is why it is important to go out of the ordinary lines of discussion, which increasingly emphasizes the big regional differences and the gap between the capital and every other place.

The other centres with widespread peripheries - mainly Plovdiv and Varna - are often underestimated despite showing great progress in the last couple of years.

It is important to focus on the secondary centres because this is where more profound changes to the regional map are actually made. There is no way to talk about economic development and/or reducing inequalities between poor and affluent districts without first paying attention to the revival of some major cities outside the capital. Plovdiv and Varna are particularly interesting, not only because they are the second and third largest cities in the country, but also because, along with their peripheries, they already have more than 1 million inhabitants. By "periphery" we mean these towns and villages - the surrounding municipalities, which have close economic ties with the big city and in fact complement the economic centre.

The similarity between Plovdiv and Varna is that both centres have extremely strong industries located in the peripheral municipalities. Maritsa and Rakovski near Plovdiv, as well as Devnya near Varna, are in the top 10 municipalities in the country by production in manufacturing - each within the range of 1-1.5 billion BGN per year. Strong industries also affect wages, with three municipalities, particularly among the maritime capital's satellites, making it to the top 15 in salaries. These are Beloslav, Suvorovo and Devnya with average salaries of 1300 - 1700 BGN per month. Similar to the industry around the capital, Plovdiv and Varna show that strong manufacturing in peripheral municipalities is key to the prospects for the big city.

Plovdiv and Varna are among the few district centres that managed to increase their population in the last couple years.

This means that the positive influx of people – i.e. more people moving in rather than moving out – manages to compensate the country-wide negative natural increase. The reasons for this, along with the strong industry, are both in the high number of students - over 50 in every 1000 people in both fields, and in the increasing opportunities for young people in the service sector.  And although Varna remains highly dependent on the seaside tourism, in this case we are referring the development of information technologies.

A general look at the ICT (information and communication technologies) sector shows that this is currently the most dynamic economic activity in the country - with the strongest employment growth in recent years and undoubtedly the highest salaries. Sofia remains the absolute leader in this field, but in the last few years things have started moving towards larger secondary centres. Plovdiv already has 4,000 employees in the ICT sector at an average salary of 2,500 BGN per month, while in Varna there are 3,600 employees at an average salary of about 1,900 BGN per month. This number may still look very limited, but it is a clear signal for the expansion of the ICT sector in Plovdiv and Varna and the emergence of a high-paying opportunities for young people outside the traditional industries.

If we take a look at the next largest secondary centres - these would be Burgas, Stara Zagora, Ruse and Pleven, we will see that they unavoidably have one or more weak sides compared to the discussed Plovdiv and Varna. Whether that would be a weaker industry in the periphery (Burgas), severely negative demographic trends (Pleven and Ruse), poor educational structure of the population (Stara Zagora), or fewer students (Burgas, Pleven, Stara Zagora) these are all factors that in one way or another limit their potential. The ICT sector, although making timid steps in these cities, has not yet taken the lead.

All that said goes to show that the next regional news will most probably be about the rise of leading secondary centres.

The big cities that traditionally have an influx of students and attract young people, where university graduates are a solid share of the working population, cities which have a strong industry in their periphery and manage to become part of the growing ICT sector, are beginning to unlock their potential. This is evident not only from the economic indicators but also from the change in the social environment - including the emergence of multiple alternative urban spaces.

The secondary centres following them, such as Burgas, Stara Zagora, Ruse and Pleven, also have their potential, but they also face the challenge of turning demographic processes steadily to their advantage.

| FULL PAPER TEXT IN BULGARIAN HERE |

This year's focus analysis accompanying the release of Regional Profiles: Development Indicators focuses on the latest developments in regional labour markets and seeks to outline the key challenges facing their growth in the near future. Despite there being employment records in most districts and a significant drop in unemployment, several districts remain away from the overall positive development, and structural problems pose difficult challenges for the future.

By the third quarter of 2019, the employment is concentrated mainly in the leading economic centres - Sofia has already exceeded 700 thousand employees, Plovdiv has 324 thousand, Varna - 229 thousand. On the contrary, in districts with continuing labour market problems the number of employees remains below 30,000. Employment growth is also uneven, with the most rapidly developing districts being those where investment in manufacturing has been accumulated.

Even with records in many districts, however, not all of them have reached the same peak in the labour market as the one before the economic crisis. Five districts did not manage to overtake their previous best achievement - Montana, Yambol, Smolyan, Kyustendil and Vidin, but only in one of them the downturn is particularly noticeable. The employment of Montana's active-age population has dropped as much as 15 points since the previous decade, and at this stage there is no indication that it will recover in the near future.

One interesting case is Veliko Tarnovo, which in the last year has set absolute records in employment for Bulgaria - employment over 80% of the active population is a rare occurrence in the economic history in general - but for now it is difficult to predict to what extent the district will be able to maintain these levels. Leading economic centres, on the other hand, have surpassed 70% employment in the last 6 to 8 quarters. Even with the increasing demand for labour, this ratio does not appear to start to decline, except in the event of a major economic crisis, for which at least there are currently no indications. It is also interesting to note that in some districts - most notably in Sliven, Gabrovo and Kardzhali, the employment dynamics are different for men and women, with the number of men employed increasing and women decreasing.

By the end of 2019 the country's registered unemployed are just under 195,000. Their distribution by districts is much more even than that of the employed, but nevertheless the leading economic centres also have the highest number of unemployed persons, mainly because of the significantly larger size of their workforce. It is noteworthy that despite the relatively smaller size of the economy in Blagoevgrad district, there is currently the highest number of unemployed. This is a consequence of the downsizing in recent years of two industries that until recently have been leading the local economy - the clothing and tobacco industries.

Even at the end of 2019, there remain seven districts where unemployment has not yet fallen below 10% of the active age population. In the capital alone, its level has fallen below the "sanitary" 2%, indicating the onset of stagnation in the labour market and impeded labour mobility. In most districts, the unemployment rate is between 5 and 10%, which points to future employment growth potential in the next year or two. This would be more difficult in the districts that have had the most aggressive expansion in the last few years - Varna, Stara Zagora, Gabrovo, where unemployment is gradually decreasing.

Undoubtedly, the most important factors that determine the dynamics of the labour market in Bulgarian districts are the educational structure and characteristics of the skills of the working-age population. The educational structure (Chart 3) certainly reflects on the ability of the districts to create new employment. As for the total share of university graduates in the workforce, the capital is ahead of all the other districts, and at the same time has the smallest share of the low-educated population. There are six districts with a share of university graduates of less than 20%, and none of them has been particularly successful in the labour market in recent years except Sofia district.

The negative demographic processes and the aging of the population are undoubtedly also the most significant problems facing districtal economies in the near future. So far, the restructuring of the economy and the growth of high value-added activities have largely mitigated the impact of the shrinking workforce, but in the medium term, it may present more hard to overcome obstacles.

| FULL PAPER TEXT IN BULGARIAN HERE |