Economic Policy Review ISSN 1313 - 0544

Current account surplus… but nobody is happy

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The biggest macro-economic problem in recent years - the current account deficit - now stuck in the past, but why does no one is up to joy? In February the National Bank announced a monthly current account surplus, which happens for the first time since February 1998, when Bulgaria was recovering from the 1996-97 economic crisis. Here, of course, we do not count seasonal surpluses during the summer months in recent years because of tourism revenue.

These data come again to confirm that current account deficits are not terribly evil in themselves, provided they are adequately funded (i.e. possibly not with debt) and the entire balance of payment position of the country is positive. As de facto happened during the years of economic growth in Bulgaria prior to the last crisis. We had large current account deficits, but they were mostly financed by inflows of direct investment and balance of payments was positive, which meant a rise in foreign reserves.

Indeed, the current account surplus should be much more worrying, since in Bulgaria they have traditionally been caused by lack of capital inflows and low or negative economic growth, which decreases imports. A few years ago an interesting study of the IMF was published, which was econometrically demonstrating straightforward causal link between capital inflows and trade deficits for Bulgaria. The data for February again illustrates this connection, but with opposite sign - we have a capital outflow, hence the current account is positive. In February this year the current account surplus reached 87.9 million, but the financial account was in a serious deficit of 741.7 million, driven by net outflows of foreign loans (ie net payment of such loans). Parallel to the net repayment of loans, direct investments (both gross and net) for the first time since the beginning of 1996 when the BNB series began, are negative, which means withdrawal of investment. Breakdown by type of investment shows that the negative balance was due to investments in other capital, i.e. again it comes to borrowing, but between the parent companies abroad and their subsidiaries at home. The only good thing which can be mentioned about the financial account is the net repayment of loans to foreign investors in February will likely lead to a new decline in external debt after its decline in January with more than 400 million. At the end of January, total external debt equaled 37.29 billion, or about 108% of our GDP forecast for 2010. Following its turbulent growth before the crisis in 2009 showed a relative stagnation of foreign debt with monthly fluctuations in both directions, but no downward trend. We can only hope that 2010 will see a more serious contraction of the external debt.

Let us return to balance of payments in February. The slight surplus on the current and capital account fails to offset the reflux of the financial account and all the negative balance of payments amounted to 426.8 million. This means that foreign exchange reserves have shrunk by that amount in February, after almost the same sized reduction (from 422.9 million euros) in January. Despite these reductions in the first two months of 2010, the level of foreign reserves remains high. At the end of February currency reserves amounted to 12.17 billion, and even mark a slight increase from a year before, when they were 12.01 billion. This improvement is even more significant if you consider the foreign reserves imports coverage indicator. While in February last year, foreign reserves could finance 5.4 months imports of goods and services, in February 2010 that already covers 7.7 months. This index increase in recent months is due to imports contraction and relatively stable foreign reserves level.

If we need to summarize, Bulgaria's balance of payments position seemingly improved in early 2010, due to contraction of the cumulative current account deficit. At the same time, however, that is hardly an occasion for joy, since it reflects the lack of capital inflows and stagnating domestic demand. Let us hope that the economic growth forecasts for the second half of 2010 will come true, whether with the cost of worsening current account.