EKIP– Expert Club for Economics and Politics A Different Opinion
Assen Vassilev will try to drain the coffers of the Bulgarian Energy Holding (BEH) in order to patch up the budget and reduce the deficit to 3% of GDP. This is clear from a letter sent by him to the new Energy Minister, the authenticity of which has already been confirmed by several media outlets. And several media outlets with very different political orientations. However, all are unanimously critical of what Vassilev is trying to do. When both Trud and Mediapool agree that something wrong is happening, it is good for us all to pay serious attention.
What is this about? Assen Vassilev wants the new Energy Minister to make BEH change the already prepared, audited and certified financial statement for 2022 by removing impairment expenses for the financial year 2022 from the income and expense statement. These impairments concern liabilities of other companies to BEH, which represent assets on the balance sheet of the holding company itself. Asset impairments are recorded as expenses and accordingly reduce profit. If their value is reduced, this will increase accounting profit and allow the state to take a larger dividend from BEH.
Without a large dividend from BEH, the deficit bill may not come due
The role of BEH is very significant in the budget for this year (or rather the rest of it), which the new Finance Minister is preparing. A key revenue measure in the new budget, according to Vassilev himself, will be the collection of 100% dividends from state-owned companies, which will bring an additional 780 million into the budget. Over 90% of these dividends will come from BEH. That is, if BEH does not enter lower depreciation expenses and, accordingly, higher profits for 2022, Assen Vassilev's account for the budget may not come out and the deficit will not fall to the assumed value of 3% of GDP. The new government wants to necessarily reduce the deficit to 3% of GDP or less so that Bulgaria can fulfill one of the key criteria for membership in the eurozone and adopt the euro as soon as possible. This was announced as a key priority of the new rulers.
However, there are several huge problems here. First, Assen Vassilev wants to rewrite an already prepared, audited and certified annual financial report. This is, to put it mildly, wrong and it is not clear whether the Minister of Finance has the authority to demand such a thing. Theoretically, he might have the right to request a new (re-)audit, which, if it finds problems with BEH's report, would lead to its correction. But it is unheard of for a Minister of Finance to simply scribble a letter asking a state-owned company to rewrite its report, without a clear justification for this, based on the results of an independent audit. The Minister of Finance, being a politically interested person, is obviously not in a position to take on the role of an independent auditor.
The Finance Minister's request may create liquidity problems for BEH
Second, if BEH's accountants and auditor have correctly calculated everything, and yet the report is rewritten as Assen Vassilev wants, then there will be a risk that the company will experience financial difficulties, specifically in terms of liquidity. To explain why, I must first explain some basic things about accounting methodology (I promise to be brief and only moderately boring). BEH has some liabilities to collect from other companies - these are expected receivables that are recorded as assets on the company's balance sheet. However, the actual receivables may turn out to be less than initially expected, less than the nominal value of the liability itself. Credit risk is an obvious economic reality. How are such contingencies accounted for?
They are reported as an expense in the income statement (OPR). Similar to how the wear and tear of physical capital (machines, for example) is reported as an expense. The company can decide not to report such an impairment loss, it can decide if it wants to that the receivables will be realized at 100%. And in this way, it can increase its accounting profit (because the expenses become lower) and distribute a larger dividend. This is what Assen Vassilev wants. Is it possible to do it? Yes, it is possible. Is it advisable? Certainly not. It creates a risk that would be reflected in the cash flow statement.
The distribution of a dividend is an outflow of cash. If the incoming cash flows are not high enough to compensate for the outflows, this opens a hole in the company's cash register and it may find itself unable to cover its current expenses and liabilities. This is exactly what can happen if the holding company reports unrealistically high receivables, does not write them down adequately and, because it did not write them down adequately, distributes too high a dividend, which has emptied the cash register too much.
Do you understand what the problem is with what Assen Vassilev is asking the Minister of Energy? If BEH's liquidity is threatened, this creates risks for the energy sector as a whole. Literally the entire energy infrastructure of Bulgaria is dependent on BEH. Among the companies in the holding are Kozloduy NPP, Bulgargaz, National Electric Company and Maritsa East 2 TPP. If the holding experiences liquidity problems, this could affect planned investment and maintenance costs for the country's energy infrastructure. Is this risk worth it simply so that the state can collect more dividends and patch up the deficit for this year? Keep in mind that according to Mediapool, BEH was even advised by the auditor to write down expected receivables by more than they entered in the certified version of the report. And now Assen Vassilev wants this write-down to be removed entirely.
However, the long-term budget deficit problem will remain unresolved.
Moreover, this would only be a temporary solution to the deficit problem. Collecting a 100% dividend from BEH, and at artificially low costs for the depreciation of expected receivables, is clearly not something that the Ministry of Finance can do every year. Therefore, in the absence of structural reforms in the fiscal sphere, next year we will again have the same problem with a deficit significantly above 3% of GDP. Because the trajectory of tax revenues is clear - their growth is weakening and will continue to weaken in view of macroeconomic trends. Interest rates continue to rise, consumption is slowing, private investments are falling, and public investments are lagging behind, precisely because we are saving on them in order to patch up the deficit. The external environment is no more favorable - economic activity is weakening throughout Europe, Germany has entered a recession.
In the foreseeable future, there is no engine of economic growth, external or internal, that would lead to an outpacing growth in tax revenues relative to government spending. This is mainly about current spending, which has been increased too much in the past few years, including by Assen Vassilev himself. It is necessary to bring the expenditure side of the budget, specifically in the area of current spending, under control, but this is politically risky. We are talking about freezing or even cutting spending on salaries, pensions and other social payments. All very unpopular measures that would certainly cause political tension for the government.
Sooner or later, however, these difficult decisions will have to be made. Because, I repeat, even if Assen Vassilev's scandalous trick with BEH's dividend were to pass now - this cannot be done every year. If BEH starts to suffer from chronic liquidity problems, the consequences for the energy sector in the longer term would be extremely severe and this would also lead to very great political tension. Taking all this into account, the logical conclusion is that the current Finance Minister does not think in the long term, but is only interested in the short-term picture, when it comes to the fiscal situation in this and probably next year. In other words, Assen Vassilev himself is either incompetent or clearly does not plan to govern for a long time (beyond 1-2 budgets) as Finance Minister.
The “follow me and flood” mentality may seem very politically palatable, especially if Vassilev does not plan to stay on the Bulgarian political scene for long – something that was hinted at in the recording of the “Continuing the Change” party meeting that leaked a few weeks ago. Of course, regardless of whether Assen Vassilev continues to govern or not, Bulgaria will suffer the consequences of his actions as finance minister. And Bulgarian taxpayers will be the ones drowning in his flood.
