Bulgaria’s finance minister has said the country’s swollen current account deficit does not imperil macro-economic stability, amid mounting concern that the Balkan state is poised for capital outflows and a hard landing.
“We have sufficiently large cushions in place [to] minimize the risks related to liquidity and solvency, so our current account deficit does not jeopardize stability or economic growth,” finance minister Plamen Oresharski told Emerging Markets.
The central bank announced on Thursday that the country’s current account deficit stood at 5.1% of GDP in the first three months of the year, down from 5.4% in the same period a year earlier. However, the monetary authority foresees the external shortfall to rise to 22% of GDP this year, from 21.5% in 2007.
Oresharski argued in an interview that Bulgaria was not exposed to an external financing shock since the deficit is paid for by foreign investment, avoiding a heavy build-up of private-sector external debt.
“The balance of payments financial account is in surplus, and fully covers the current account deficit. The structure of the net capital inflows – mainly FDI and a small share of portfolio investment – is an indicator of the sustainability of the financing,” he said.
Standard & Poor’s placed Bulgaria eighth most at risk of an abrupt economic dislocation in its Liquidity Vulnerability Index in April, as risk-averse investors seek to shun assets in countries facing such external financial shortfalls. Foreign direct investment slowed to 740 million euros in the first three months of the year, down from 897.2 million a year ago, covering 44.3% of the current account gap.
This has spurred warnings from economists that “the risks of a hard landing – though not as severe as, say, in Estonia – are very high in Bulgaria,” said Lars Christensen, senior analyst at Denmark’s Danske Bank. “We will see a sharp drop in domestic demand over the coming months that cause a costly economic adjustment.”
But Oresharski disagreed that the country could incur a costly macroeconomic adjustment on the back of lower foreign investment. In any case, he said, “we have sufficient foreign and fiscal reserves to address any eventual negative effects of external financial fluctuations.”
Strong growth at 6.2% of GDP in 2007, and rapacious domestic consumption, have aggravated external imbalances.Oresharski argued that Bulgaria would have to live with the current account deficit due to the country’s “importation of machines and equipment which determines the increase of investment goods importation.”
Nevertheless, he argued that the global liquidity strain “could have a corrective effect on the high investment activity in the country,” helping to lower the current account deficit and inflation that reached 14.6% year-on-year in April.
He maintained that strong growth is sustainable in the medium term and “its structure and quality will be improved towards increased contribution of imports.”