Invest in New Bulgaria Ministry of Economy July 2003

The Competitive Edge of Bulgaria u Strategic geographic location u Liberalised access to markets with over 560m consumers (incl. EU, CEFTA, Turkey) u Almost 100 agreements on the protection of investments and avoidance of double taxation u Forthcoming NATO and EU membership

u Among the lowest costs of doing business in Europe u Robust legal framework focused on attracting and protecting foreign investment u Fast improving business climate –among the lowest taxes in Europe –significant reduction in regulatory obstacles and start up costs –aggressive business stimulus package introduced in 2002/2003 u Institutional support for major foreign investment projects u Superb academic and vocational training u Excellent labour quality/labour cost ratio –average monthly salary of EUR144 Investors in Bulgaria Will Find...

u Simplified licensing, permit and registration regimes –simplification or abolishment of more than 50% of the existing ones; clarification of remaining regimes –new regimes to be imposed solely by Parliament vote u Ambitious economic programme stimulating the economy –0% profit tax in over 1/3 of the territory of the country –pending creation of industrial zones with significant investment incentives –VAT-free imports for investment projects over EUR5 m u Adoption of International Accounting Standards (IAS) –2003 for financial institutions and public companies –2005 for all other companies Significant Business Climate Improvements

Macroeconomic Indicators

u Industrial production grew by +23.4% yoy in March and by +9.2% yoy in April. Industrial sales – by +30.4% and +9.6% respectively u Exports for the first four months jumped up by impressive +40.4% yoy u Unemployment went down to 14.3% in May 2003, a record low level for the last three years u Inflation stays at bay: 0.8% for the first five months, 1.5% of the year and deflation of 0.6% is recorded for May Bulgarian Economy in Early 2003: Accelerating Growth

Bulgarian Economy in 2002: Well on Track u Bulgaria is among the leaders in Europe in economic growth: 6.4% in Q3, 3.4% in Q4, 4.8% for 2002 u Inflation of 3.8% u Unemployment of 16.27%, a drop of 1.63% compared to 2001 u Record high forex reserves: EUR4.58bn u Near record low external public debt: USD8.3bn u Robust growth in tourism revenues: 10% compared to 2001 u Improving current and trade account deficits to GDP ratios

Macroeconomic Stability – Testimony from Abroad u The Government’s economic program has received positive evaluation. The country’s credit rating has been raised on several occasions. The rating for Bulgaria’s long-term foreign currency currently stands at: –BB+ (with stable outlook) according to Standard&Poor’s –BB (with positive outlook) by Fitch IBCA –Bа2 (with stable outlook) by Moody’s –BB+ (with positive outlook) by the Japan Credit Rating Agency –more rating upgrades are expected in 2003 u Support of the international financial institutions –the IMF approved a two-year stand-by agreement for SDR250 m –the World Bank adopted a supporting strategy worth USD750 m in total –the EBRD launched a USD500 m private sector financing program

u VAT-free imports for investment projects over EUR5 m u 0% profit tax in high unemployment regions u Significant reduction of bureaucracy –introduction of one-stop-shop –Introduction of “silent consent” approach –reduction of licensing regimes –new regimes to be imposed solely by Parliament u Planned creation of industrial zones with significant investment incentives u Planned introduction of 100% yearly depreciation for equipment for priority investment projects Second Generation of Economic Reforms (1)

u The launch of a Private Equity Fund(s) is shortly expected – state participation of up to EUR51 m (BGN100 m) – additional investment from the private sector – the funds will be invested in equities of developing Bulgarian companies – strong competition for the professional management of the Fund: 15 applications –4 candidates selected (TBIF Financial Services BV and Equest Partners Ltd., Copernicus Capital Management SP, GED Capital Development SA, Time Capital Partners and BAC) Second Generation of Economic Reforms (2)

GDP Growth (by Quarters, %) Source: CANSTAT, EUROSTAT

Source:EBRD, Ministry of Economy GDP Growth (%)

Gross Domestic Product (EUR bn) Source: Ministry of Finance

GDP Structure (by Sector, %) Source: National Statistics Institute

GDP Structure (by Ownership, %) Source: National Statistics Institute

Annual Inflation (%, Year-End, E) Source: National Statistics Institute

Inflation (%, Year-End) Source: Governmental Sources and National Statistics Institute

Unemployment (%, 01/ /2003) Source: Employment Agency

Unemployment (%, 01/ /2003) Source: Employment Agency

Base (Benchmark) Interest Rate (%, 01/ /2003) Source: Bulgarian National Bank 2.96%

Base (Benchmark) Interest Rate (%, Year-End) Source: Governmental Sources and Bulgarian National Bank

Budget Surplus/Deficit (% GDP) Source: Governmental Sources and Ministry of Finance Bulgaria CEE Countries (2002)

Foreign Exchange Reserves (EUR m, ) Source: Bulgarian National Bank

Foreign Debt (USD m, ) Source: Bulgarian National Bank

Government Debt (% GDP, ) Maastricht criterion Source: Ministry of Finance 105.1% 83.2% 86.7% 77.1% 70.1% 56% 50% 60% 70% 80% 90% 100% 110%

Source: National Statistics Institute Average Monthly Salary (EUR, 01/ /2003)

Source: AIMS Human Capital Bulgaria (2002) Low average High average Gross Monthly Salary Levels (USD)

Low average High average Source: AIMS Human Capital Bulgaria Gross Monthly Salary Levels (USD)

Gross Capital Formation (% GDP, ) Source: National Statistics Institute

Gross Capital Formation (BGN bn, ) Source: National Statistics Institute Gross Capital Formation (BGN bn, )

Macroeconomic Indicators (1) Source: Ministry of Finance

Macroeconomic Indicators (2) Source: Ministry of Finance, Ministry of Economy and Bulgarian National Bank

Taxation

Among the Lowest Taxes in Europe u Corporate tax –23.5% –0% in regions with high unemployment, 1/3 of the country’s territory –fast depreciation rates: 2 years for computers, 3 1/3 years for equipment u Personal income tax –highest rate at 29% –rates of 0, 15, 22, 26 and 29% (year 2003) u Capital gains tax: 0% u Interest income tax: 0%

0% Corporate Profit Tax in 2003 (Green Regions) N.B.The list is solely based on unemployment figures The regions include industrial sites with developed infrastructure

Tax and Accounting Reform u Adoption of International Accounting Standards (IAS) from 2003 for financial institutions and public companies and from 2005 for all other companies u Introduction of 100% yearly depreciation for equipment for priority investment projects u Creation of a single State Revenues Agency u Value added tax (VAT) –exemption for imports for investment projects over EUR5m –general tax refund time falls from 4 to 3 months –45 days refund for export-oriented companies –exemption for software exports –registration threshold falls to BGN50,000 from BGN75,000

Source: Ministry of Finance Personal Income Tax Rates/Brackets (%, )

Market Access & Foreign Trade

Preferential Market Access (1) u WTO membership since 1996 u European Union Association Agreement u EFTA Agreement u CEFTA membership u Free Trade Area with Turkey, Macedonia, Latvia, Lithuania, Israel, and Estonia u Sighed Free Trade Agreement with Albania u Pending signature of a Free Trade Agreement with Moldova, Bosnia & Herzegovina, and Serbia & Montenegro

Preferential Market Access (2) European Union EFTACEFTAOthers Pending FTAs: - -Bosnia & Herzegovina - -Serbia & Montenegro - -Moldova Free Trade Agreement With:

Source: National Statistics Institute Exports (by Region, %, )

Source: National Statistics Institute Imports (by Region, %, )

Source: National Statistics Institute Exports (by Country, %, )

Bulgarian Export Growth (%, ) Source: Bulgarian National Bank

Bulgarian Exports (by Commodity Groups, 2002) Source: National Statistics Institute

Bulgarian Imports (by Commodity Groups, 2002) Source: National Statistics Institute

Source: Governmental Sources and Bulgarian National Bank Bulgaria CEE Countries (2002) Current and Trade Account Deficit/Surplus (% GDP)

Foreign Trade with the European Union (USD bn, F)

Foreign Trade Projections Up to 2005 u Improving trade balance –trade deficit to drop from USD1.3 m in 2001 to USD0.9 m u Exports will continue to grow, reaching a 29% increase compared to 2002 u Imports will continue to grow, reaching a 14% increase compared to 2002 u Exports/imports ratio will increase to 0.82 (from a current value of 0.74) u No major changes in commodity groups’ relative shares of exports and imports

FDI and Business Climate

Source: Bulgarian Foreign Investment Agency Foreign Direct Investment (USD m, )

Source: Bulgarian Foreign Investment Agency Inflow of Foreign Investment (by Sector, % and USD m, )

Source: Bulgarian Foreign Investment Agency Inflow of Foreign Investment by Country (USD m, )

u Privatisation Law –completely new law embodying new philosophy –state-owned stakes in some 1,600 enterprises are declared open for privatisation –no preferences for employee-management buyouts –limited deferred payments –concentration of privatisation process in a specialised body-the Privatisation Agency –new Post-Privatisation Control Agency Privatisation (1)

u Privatisation achievements (2002) –Biochim Bank –DZI (insurance) u Privatisation achievements (2003) –DSK Bank –12.8% Bulgartabac on the stock exchange u Forthcoming major deals (2003) –BTC (telecommunications) –Electricity distribution companies –Bulgartabac Privatisation (2)

Source: Privatisation Agency Privatisation Revenues (EUR m, )

u In June 2003, the Parliament approved the removal of 20.5% (c. 74 out of 360) of the existing licensing, permit and registration regimes, and for the simplification of another 33% (c. 120 out of 360) of them u About half of the changes have already been implemented u A new Law on Administrative regulation and control of commercial activity became in law in June 2003 establishing the new registration and permit regimes and reducing the bureaucracy in the business environment Business Climate and Reduction of Bureaucracy (1)

u An upsweep in the activity of the courts with regard to companies u According to Transparency International data, in the period Bulgaria has moved from the 66 th to the 47 th place in the list based on the international index of corruption perceptions Business Climate and Reduction of Bureaucracy (2)

* Higher figures show improvement * Transparency International Index WEF Corruption Subindex Ranking Source: Transparency International, World Economic Forum Global Competitiveness Report International Corruption Indicators

u Bulgaria’s secondary education is among the best in the world in recent years: 5 th in the world in sciences, 11 th in mathematics in late 90s u Bulgarians rank second in international IQ tests (MENSA International) u Bulgarians are among the top university students worldwide (2 nd in the world in SAT scores) u Many students abroad u A top-quality MBA (Master of Business Administration) program started in 2003 Education

IT Certified Professionals (Top 10 Countries in % of Population) Source: Global IT IQ Report of March 2002 of Brainbench, Inc. The data for the population is taken from the mid-2001 estimates of U.S. Census Bureau, International Database and The World Factbook, 2000

Electronics & Electrical Engineering u Strategic sector with priority in long-term development programs u Potential for more than 200 enterprises with possible specialisation in: –Electrical engineering, Computer and office facilities, Electronics, Radio engineering and communication equipment, Household appliances, Defense industry Source: Bulgarian Foreign Investment Agency

IT and Telecoms u Cross-point for telecommunications traffic from Europe to the Middle East and Asia u Regulatory framework harmonized with EU standards u By rate of development in 2000, Bulgarian market for mobile telephone services ranked 5 th among CEE countries; over 2m mobile phone subscribers u Telephone switch exchange manufacturing presents another opportunity Source: Bulgarian Foreign Investment Agency

Energy u Stable legal and regulatory framework harmonized with EU standards u Positioning of Bulgaria as a reliable country for the provision of future transit of oil, natural gas and electric power and as a dispatching and market center in the region u Introduction of clear and sustainable market rules and a clear schedule for the opening of the internal and external energy market to competition u Infrastructure projects expected to form the major investment inflow and contribute most to economic growth u Power generation and distribution companies offered for sale Investments expected until 2005 USD bn

Transport and Logistics u Strategic geographic location u Infrastructure comprising more than 37,000 km road, including 416 km highways u 6,500 km railways, more than 64% electrified u Two main ports, servicing over 60% of foreign trade u The Danube River and the Black Sea as international water roads u Five international airports Source: Bulgarian Foreign Investment Agency

Leisure u Established holiday destination for Germans, Scandinavians, British and East Europeans u 2.993m tourists for 2002 u USD1.2bn revenues in 2001, USD1.334bn in 2002 u Bulgaria is one of the few European destinations with strong growth in tourism in 2002 u Wide range of products: Beach/Recreation, Winter Sports, Spa/Health, Culture/Museum/Monasteries, Nature/Activity, Touring, Conference Source: Bulgarian Foreign Investment Agency

Textile and Clothing u One of the oldest and fastest developing sectors u Some 3,000 enterprises, accounting for 22% of exports u Opportunity for productivity gains by investment in modern equipment u Main partners and consumers include Germany, France, Italy, Belgium, USA, Canada and the Scandinavian countries Source: Bulgarian Foreign Investment Agency

Food Processing and Beverage Industry u Excellent climate and natural conditions u Established traditions u Famous for organic food production u EU support program, SAPARD, extending EUR52m per year for u Up to 50% investment subsidy provided for private investment projects to Bulgarian registered companies, incl. with foreign participation Source: Bulgarian Foreign Investment Agency

Customs Regulations u Customs Act harmonized with the EU Customs Code u Inward processing preferences without or with limited collateral u Option for local custom office for major industrial companies u Option for simplified export/import customs declaration procedures u Option for inward processing under customs control

Tourism Sector

Source: Bulgarian National Bank International Tourism, Balance of Payments (m USD, )

*Excl. Children Without Own Passports) Source: Ministry of Economy International Tourist Arrivals (Thousand People*, )

No.CountriesTOTALTOURISMVFR**BUSINESSOTHERTRANSIT TOTAL MACEDONIA* YUGOSLAVIA* GERMANY GREECE UNITED KINGDOM RUSSIA ROMANIA* ISRAEL SWEDEN POLAND CZECH REP SLOVAKIA UKRAINE FINLAND DENMARK FRANCE TURKEY BELGIUM U.S.A AUSTRIA *Including "Shuttle trade" **VFR - Visiting friends and relatives Top 20 Countries for International Arrivals (Number of People, )

Source: Ministry of Economy International Tourist Arrivals (Thousand People, P)

Source: Ministry of Economy International Tourism Receipts (m USD, 2003P-2005P)

Financial Sector

– Bulgaria – Currency Board Arrangement u BGN1 = DEM1 = EUR u Long-term goal for EU membership, the anchor currency being the Euro –The share of the Euro in the external trade is constantly increasing –The EU is by far the leading trade partner of Bulgaria –The CBA helps curb inflation – a step towards meeting the Economic and Monetary Union criteria u No indications that Bulgaria should exit the CBA

u Total banking sector assets account for 41% of GDP u Over 80% of the assets in the banking sector are in private hands u Over 80% foreign share of total bank assets u Following the privatisation of DSK (the State Savings Bank), the banking sector is almost completely privately owned Banking Sector Overview (1)

u 45% yoy increase in banking system assets in 2002 u High levels of capital adequacy and liquidity (by 2002) –25.2% total capital adequacy –11.2% primary liquidity (percentage of deposits) Banking Sector Overview (2)

Source: Bulgarian National Bank Commercial Banks Assets, Deposits and Loans (BGN bn, 01/ /2003)

Source: Bulgarian National Bank 6.4 Commercial Banks Credits to Non-Government (BGN bn, 01/ /2003)

Source: Bulgarian National Bank Commercial Banks Deposits and Credits as % of Total Assets (01/ /2003) 60.7%41.9%

Source: Bulgarian National Bank 3.34 Commercial Banks Non-performing Loans as % of Total Loans (01/ /2002)

Source: Bulgarian National Bank Commercial Banks Total Loans (BGN bn 01/ /2002)

Source: Bulgarian National Bank 545 Banking System Financial Result (BGN m, 01/ /2003)

Source: Bulgarian National Bank Capital Adequacy (%)

Source: Bulgarian National Bank 6.64 Loan-Deposit Interest Rate Spread (%, 01/ /2003)

Source: Bulgarian National Bank Steady Growth of M2 and Quasi-Money (BGN bn, 01/ /2003)

u Bulgarian Stock Exchange – Sofia –Doubled turnover in 2002 against the previous year –The stock exchange index (SOFIX) increased by 270% since the June 2001 parliamentary elections u Radical measures for the protection of minority shareholders’ rights u A new Privatisation Law which sets a new era in Bulgarian privatization by radically improving the transparency, speed and economic effectiveness of the deals concluded Capital Markets (1)

u International Accounting Standards (IAS) –2003 for financial institutions and public companies –2005 for all other companies u A new Law on Deals in Compensatory Instruments u Major changes have been made to the Securities Law u A list has been approved comprising c. 1,084 companies with state participation in the capital ownership, for the privatisation of which payment through different kinds of vouchers (non-cash instruments) is allowed. The shares of 95 of these companies are to be traded on the stock exchange Capital Markets (2)

Source: Bulgarian Stock Exchange Bulgarian Stock Exchange - Sofia (SOFIX Index, 23/10/ /06/2003) % - 29%

Brady Bonds

Brady Bond Exchanges: Parameters u March 2002: Bulgaria exchanged USD1,326 m of Brady bonds into a new USD512 m Eurobond with a coupon of 8.25% maturing in 2015 and a new EUR836m Eurobond with a coupon of 7.5% maturing in 2013 u September 2002: Bulgaria exchanged USD888 m of Brady bonds for an increase of USD759 m in the 2015 Eurobond

Brady Bond Exchanges: Effects on External Public Debt u Decrease in debt face value by USD186 m u Release of USD340 m of collateral u Lengthening of the average maturity by 4 years u Decrease of debt service payments over next 10 years by around USD1.1 bn u NPV saving of USD126 m

Investment grade countries or countries with split ratings Eurobond spreads Bulgaria’s Spreads: Investment Grade League

Bulgarian Institutions on the Internet  Bulgarian state institutions in the field of economics activity: –Ministry of Economy: –Ministry of Transport and Telecommunications: –Privatisation Agency: –Bulgarian Trade Promotion Agency: –Bulgarian Export Insurance Agency: –Bulgarian Foreign Investment Agency: