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FACTBOX-Key political risks to watch in Bulgaria

SOFIA May 3 (Reuters) - The European Union's poorest member Bulgaria is slowly recovering from a deep recession which has cut incomes and boosted unemployment, hitting the popularity of its centre-right government.

The slowdown has forced the Balkan country to cut spending and freeze public salaries and pensions to reduce its fiscal deficit and avoid putting pressure on its currency, pegged to the euro.

A spike in food and fuel prices on top of the austerity cuts and delayed reforms is eroding support for the minority government of Prime Minister Boiko Borisov. However, it still has a solid grip on power thanks to the backing of the nationalist Attack party.

The government also suffered a setback when France and Germany made it clear Bulgaria would not be allowed to join the EU border-free Schengen zone until it shows tangible results in fighting corruption and organised crime.

Below are the main political risks for Bulgaria.


[size=150:ko4qqi58]GOVERNMENT SUPPORT
Support for Borisov's GERB party has fallen since it won elections in 2009, while the popularity of its main rivals, the opposition Socialists, rose in April, narrowing GERB's lead. [ID:nLDE73D183]

Elections later this year for the largely ceremonial post of president and for city mayors could herald a shift in the balance of power, as Bulgarians' confidence that the government can improve living conditions, the lowest in the EU, declines.

Socialist President Georgi Parvanov has signalled plans to return to active politics and political analysts say he could emerge as a popular figurehead capable of challenging Borisov, whose mandate runs until 2013.

What to watch:

-- How much more support will GERB lose on economic issues? While its grip on power is unlikely to loosen in the short term, it could face growing opposition and no-confidence votes in parliament.

Political uncertainty is unlikely to affect the lev currency because it is pegged to the euro, but could increase the cost of insuring Bulgaria's sovereign debt and make it more expensive to borrow money.


[size=150:ko4qqi58]CORRUPTION AND CRIME
Corruption and organised crime are still a blight on the country 20 years after the end of communist rule. Favouritism and a need to grease palms to secure business deals are a deterrent to foreign investors and a hindrance to economic growth.

Germany and France objected to Bulgaria and Romania joining the EU's Schengen zone in March because of concerns over corruption. [ID:nLDE6BL0Q5]

The convictions of two senior officials this year for abuse of power and embezzlement are steps in the right direction and Sofia has won praise from the EU, but it still needs to maintain efforts and put more high-level corrupt officials behind bars to show it is serious. [ID:nLDE70P10M]

The government's credibility suffered a blow in late January when transcripts leaked to the media alleged Borisov offered a brewery owner protection from customs checks and the opposition Socialists said it implied high-level favouritism.

Borisov has denied any wrongdoing and said the leaked tapes were a result of his push to sever links between high-level corrupt officials and organised crime. [ID:nLDE70J22X]

What to watch:

- Will the government maintain its political will to crack down on corrupt practices? This is unlikely to move markets in the short term but sends an important signal that Bulgaria is becoming an easier place to do business.


[size=150:ko4qqi58]WEAK ECONOMY
The cabinet sees the economy expanding by 3.6 percent this year after rising exports pulled it out of recession in 2010, but growth will not reach pre-crisis levels because a boom in real estate and construction will not be repeated. [ID:nLDE73E1SS]

The cabinet froze salaries and pensions and cut ministry spending by about 20 percent in 2010 and is keeping spending at a similar level this year to avoid further drops in demand.

If domestic demand remains weak, tax revenues will be lower than expected and social spending probably higher, endangering government plans to halve the budget deficit to 2.5 percent.

Inflation rose to an annual 5.6 percent in March because of a spike in food and fuel prices caused by a surge in global prices.

More than 120,000 workers have lost their jobs in the past two years and unemployment was 9.5 percent in March. More than a fifth of the population live on less than $6.50 per day, according to the latest available data from 2008. The number of unemployed people below the age of 29 has doubled in the past two years to about a fifth.

What to watch:

- Will domestic demand remain weak, hitting fiscal revenue and deficit targets? This could increase the cost of insuring Bulgaria's debt and make it harder to tap international markets.

- Will the cabinet loosen fiscal policy to maintain its popularity before local and presidential elections later this year?


[size=150:ko4qqi58]REFORMS, EU FUNDS
The cabinet has pledged to overhaul the inefficient healthcare system, but reform hit a snag when doctors protested against hospital closures and underfunding. Threats of large-scale strikes forced it to water down the pension reform and it has delayed a privatisation programme. [ID:nLDE70O0B0]

It speeded up its use of available EU aid in the past year but the country still used only about 10 percent of the 7 billion euros available through 2013, mainly because of inefficient bureaucracy and a lack of well-prepared projects.

What to watch:

- Will Bulgaria press ahead with reforms or will popularity concerns and fear of public unrest delay overhauls?

- Will the government be able to make more efficient use of EU funds? Failure to do so is unlikely to move asset prices but may deter foreign investors, slow infrastructure improvements and undermine economic recovery