Every prospectus for the public offering of shares shows that it is good to keep in mind several types of risks when dealing in securities. The political risk is among these as well.

One of the prospectuses for the offering of shares on the Bulgarian Stock Exchange (BSE) reads as follows: Bulgaria's full EU and NATO membership, the maintaining of a stable currency board, the synchronizing of the national legislation with that of the EU member countries and Bulgaria's undertaking of a number of international commitments minimizes the influence of that risk.

Despite the forecast stability, a negative implication on the level of the political component of the non-diversified risks may be generated by the possible delay in the reforms, as well as by the differences and the discrepancies between the political parties on major social and economic measures or by the rising level of social discontent due to the slowly improving standard of living.

We have been witnessing a governmental crisis in the recent months with no clear outcome at this point. It would be only normal for one of the three members of the tripartite ruling coalition to start shifting away from its partners. We are also experiencing a rising inflation as European Commission's next report on the country will be published either in the end of June or in the beginning of July. As a result we could be witnessing another no-confidence vote for the government.

Bulgaria's political instability comes at a time when the global financial markets are in a crisis. The forecasts on the global economic growth are constantly being revised down. A similar factor should be taken into consideration when expecting foreign investors to come to BSE.

This article focuses on the issue as to whether the processes taking place on BSE may be seen in the light of the political instability. It also brings to the fore the question as to whether it is possible to estimate the losses for the Bulgarian economy from the blocking of EU funding for the country.

Profit.bg contacted politicians, businessmen, portfolio managers and consultants to discuss on the issue.

There is an indirect correlation between the political situation and the present condition of the capital market, according to Martin Dimitrov, MP for the Union of Democratic Forces and deputy chairman of the parliamentary budgetary committee.

"When there is insecurity the natural reaction of investors is to seek lower risk investment instruments. The capital markets and BSE in particular offer high-risk instruments“, Dimitrov said. „Coupled with inflation, governmental instability and corruption allegations, we see that Bulgaria continues to have a high-risk profile“, Dimitrov added. Indicative of this is the fact that foreign investors are withdrawing from the local market or are shifting their focus to the real estate sector, according to Dimitrov.

A major advantage of the Bulgarian capital market is the fact that investments in operating companies have been made, Lidia Shuleva, member of the parliamentary budgetary committee said. Such investments guarantee stability to some extent, regardless of the political instability in the country, according to Shuleva.

„Another advantage is the fact that other risk instruments, such as derivatives, are also being offered on the market, Shuleva added.

Representatives of the tripartite ruling coalition that are also members of the committee were nor reached for comment.

There is a correlation between the political instability and the market conditions, according to Krassimir Atanassov, portfolio manager at Elana Fund Management. „It could be said that there is a correlation and it could be seen clearly in the listed infrastructure companies, Atanassov commented.

The blocked EU funding for Bulgaria under the PHARE, ISPA and SAPARD programs may be given as an example of the interference of politics in the economy. The bad management and control over the funding was stated officially as the reason for the imposed measure.

"The political instability in the country in the recent weeks definitely reflected on stock exchange trading. Along with other risks, the capital markets are also very sensitive to political instability”, according to Geno Tonev, portfolio manager of Ug Market Maximum.

The latest unrest as regards to government's incapability of controlling the EU funding has brought fears in investors, including that serious sanctions and restrictions may be imposed by the EU. Even though this is very unlikely to happen the sheer fact that the EU is already pulling our years is sufficient to make some investors have a different approach to the country and the capital market in particular.

“As regards to the representatives of the Bulgarian business on BSE, they will be affected only indirectly by the political crisis – an outflow of portfolio investors and a possible slowdown in the raising of capital through BSE".

Profit.bg reached the managerial team of Agria Group Holding to comment as to whether the losses of the Bulgarian economy from the blocking of EU funding may be estimated. Emil Raikov, executive director of the company shared his view on the issue.

„EU's main program aimed at developing the agriculture in the country is the Operational Program Rural Development (2007 – 2013) with a total budget of 3.241 bln euros. The EU provides some 80% of the funding, while the remaining 20% is state co-financing, Raikov said. The agrobusiness in Bulgaria has a great potential for development, according to Raikov.

„We should also take into consideration the fact the funding comes from European taxpayers and the EU is bound to protect their interest. And in the process of monitoring the absorption of the funding the European Commission stumbles upon some unregulated deals to put it mildly. This results in sanctions under the ISPA, PHARE and SAPARD programs, Raikov said.

The signals Bulgaria and its administration send to the EC are very disturbing, according to Raikov. The business delayed its operations along with the nearly one-year delay of the start to EU's agrobusiness programs and the Competitiveness program, Raikov added.

Stoyan Nedev, consultant at Elana Investment, also commented on the issue. The losses of the Bulgarian economy cannot be estimated precisely and it is still early to talk about losses at this point, according to Nedev. “The beneficiaries are affected only by the suspension of the funding on projects that have already been approved and from the delay of new procedures for projects applying for funding, Nedev added.

The fact that check-ups are being conducted and measures are being taken to improve the control and the management of the EU funding is rather positive for the existing and potential beneficiaries, according to Nedev.

Bulgaria has been shifting away from the EU in the recent years, according to Shuleva. The shifting of Bulgarian politics away from the EU would mean blocking of the financing from the EU funds, according Shuleva. The possibility of the EU invoking a safeguard clause on the absorption of the funding is like the sword of Damocles above the country, according to Shuleva.