The Strengths and Weaknesses of the Capital's Economy during the Pandemic
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.
