Банкеръ Weekly



The solvency of a country is determined (in the long run) by several criteria, the most important of which are the amount of government savings in the Bulgarian National Bank (BNB) (the so called fiscal reserve), the amount of the state debt and the the current account deficit in the balance of payments. The significance of the first two indicators hardly needs to be discussed, since the government may use its savings either to pay off the foreign debt or to cover unexpected costs such as those necessitated by the floods this summer. In the end of August 2005 (according to information from the BNB)the Government's fiscal reserve amounted to BGN4.3BN- just BGN100MN below the level reported at the beginning of the year, although in the past eight months the government spent more than BGN2BN on serving the state debt. For the same period of time its liabilities, as well as the debts of municipalities to foreign creditors fell from EUR5.8BN (at the beginning of the year) down to EUR4.6BN in the end of August 2005. The result is due to the purchase of all remaining Brady bonds with a face value slightly exceeding EUR1BN. The purchase was carried out in two stages - in February and July 2005, and then the amount of the country's foreign debts became lower than the amount owed by private companies to foreign creditors, accumulated since 1999 and reaching EUR5.7BN. Bulgarian banks' debts to foreign creditors account for EUR2BN of it.Thisconsiderable foreign debt of the private sectorconcerns indirectly the stability of the public finances. And its payment is directly related to the export of currency from the country - it is used to redeem interests and principals on credits drawn from foreign companies and banks. It is exactly this draining currency that reflects on the growth of deficit in the current account of Bulgaria's balance of payments. Its balance reflects to the greatest extent the net amount of currency that goes in (in case of surplus) or out (in case of deficit) of the country. That is why the International Monetary Fund (IMF), the World Bank and the other financial institutions watch quite strictly the condition of the current account of the balance of payments and require that the new Bulgarian Government take further measures to reduce its deficit. It was not by chance that during last week's visit of the IMF Mission, its Leader Mr. Hans Flickenshield expressed concern with the growing current account deficit which amounted to EUR1.38BN for the first half of 2005, whereas it was EUR1.47BN for the entire 2004.There are two major factors that influence the amount of the current account - the foreign trade balance and the services balance. For nearly seven years rulers and the subordinate state administration have been unable to fight the deepening negative trend ofa growing deficit in the foreign tradeIn 1998 it amounted to EUR328.4MN (2.8% of GDP), while in 2004 it was EUR2.7BN (13.9% of GDP). For the first half of 2005 the trade deficit reported by statistics was EUR1.6BN (8% of GDP) and according to the forecasts it is going to exceed EUR3BN at year-end. The abrupt increase of oil prices is among the reasons most often pointed out for that result. The BNB statistical data logically pay special attention to the influence of crude oil prices on the results of the Bulgarian foreign trade. The most recent analysis of the central bank makes the following conclusion: Crude oil and natural gas account for 13.5% of the country's import. From the beginning of 2005 till the end of June the price of oil imported in the country went up by 35.5% compared to the same period of 2004. According to customs declarations, the amount of oil imported in Bulgaria for the first half of 2005 was up by 14.1% compared to the same period of 2004 and the amount of imported oil products was up by 31.7 per cent. That growth could have been compensated by raising the prices of some basic goods that the country exports such as copper, zinc, lead, carbamide, hot-rolled steel. Copper prices on the international markets as of June 30, 2005 were 31.2% higher than those registered in the middle of 2004. The zinc and lead prices increased by 24.8 and 13.3% respectively for that period, those of carbamide were up by 36.7%, and of hot-rolled steel - up by 23.8 per cent.Bulgaria's problem consists in the fact that apart from oil it also imports a huge amount of investment and consumer goods. But while investment ones reflect positively on raising the amount and quality of products made in Bulgaria, consumer goods indicate that no quality goods are produced for the local people. Moreover, data published by the BNB show that the major growth of consumer goods import is accounted for by foods, cigarettes and medicines - items that businesses in Bulgaria should be producing in sufficient amounts.The statistics of the balance of payments published by the central bank indicate that the foreign trade deficit is usually compensated in part bythe services balanceTourism revenues are the most important item in it. Thanks to them, the services balance had been positive in the past seven years. In 1998 it amounted to EUR353.3MN, and in 2004 - to EUR723.5MN. Whether or not the growing trend is going to last depends entirely on the net revenues in leisure industry. They amounted to EUR305MN for the first half of 2004, but reached EUR354.6MN by June 30, 2005. Net tourism revenues at the end of 2004 amounted to EUR1.5BN.In principle, the current account deficit is not dangerous if it is covered by other revenues in the balance of payments. The economic results reported by the Baltic countries - Lithuania, Latvia and Estonia, which already initiated the two-year mechanism for introduction of the euro as a national means of payment, prove that. Compared to the other newly-accepted members of the European Union (EU), Baltic republics had the highest annual growth of GDP - between 5.1 and 9.7% for 2004. They reported budget surplus and their foreign debt as a proportion to the GDP ranged from 5.3% for Estonia to 21.4% for Lithuania. At the same time, however, the current account deficit in their balances of payments was quite high. For Estonia it was 12.6% of GDP, for Latvia - 7.5% of GDP, and for Lithuania - 6.9% of GDP. Nevertheless, that deficit did not destabilize the economies of the three countries as it was covered by foreign investments.It's a fact that by the end of 2004 Bulgaria was also coping with this task. Net receipts from foreign investments alone exceeded EUR2.1BN last year. And the money, remitted by Bulgarians abroad to accounts of their relatives in our country, amounted to EUR900MN-plus. Thus, despite the huge deficit and the considerable current account payments for servicing the foreign debt - more than EUR1BN - the forex reserve in the BNB was not diminishing and even increased by EUR500,000MN-plus. However, this trend will hardly persist in 2005. Receipts from Bulgarians working abroad are still sustained high. For the first six months of 2005 they totalled EUR415MN, while for the same period of last year they amounted to EUR354MN. But the situation regarding direct investments is different. For the first half of 2004 they exceeded EUR1BN, while in the same period of this year they amounted to just EUR660MN. At that, not a single euro came from privatisation in 2005, while EUR243.1MN came from divestment deals in the first half of last year. It's a fact that privatisation in this country is coming to its end and proceeds from it will gradually disappear. It is troublesome that not only investments in the establishment of new enterprises decreased in the first six months of 2005 - by almost EUR200MN - but also in the increase of equity of already existing private companies with foreign capital. And it is these investments on which Bulgaria will be counting over the following years to cover the current account deficit in the country's balance of payments.In fact, the activity of foreign capitals in the establishment of new production capacities in Bulgaria is an indicator, showing if a steep decrease in the trade balance deficit could be expected in the near future and hence a decrease in the current account deficit as well. Because even students in economics know that the creation of a competitive production is connected with the decrease of imports (and foremost that of consumer goods) and increase of exports. The achievement of that target practically formulates as wellthe major tasks that any government faces - reduction of taxes and insurance contributions and abstention of the executive power from a steep increase of budget salaries. Therefore, during each visit of the IMF Mission to Bulgaria the government is required to commit itself to the fulfilment of these tasks. A similar purpose underlies the judicial reform, enforced by the IMF, the World Bank and the EU. Because foreign capital will be coming to Bulgaria in future only if the country ensures investors advantageous taxation and security against unscrupulous partners.

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