As expected the current account deficit continued to shrink during January following the stable reduction trend since the end of 2008, i.e. since the crisis was felt in Bulgaria. The deficit shrunk to 248.9 mln. Euro compared to 401.4 mln. Euro for January 2009. Compared to GDP the deficit shrunk from 1.2% in January 2009 to 0.7% from the official BNB (Bulgarian National Bank) GDP forecast for 2010.
The main reasons for that are the double digit export price in January (+12.8%), for which we were prepared by the preliminary assessments, the continuing import drop per annum as well as smaller income balance. The export growth is surely good news especially if we take into account that it is maintaining positive trend for a third consecutive month. The continuing import drop is due to both suppressed internal demand, which will most probably stay like that till the end of 2010, and to the sharp foreign investments drop in the country, which generated big part of the last years’ import. The shrinking income deficit is due mainly to lower repatriated foreign company revenue caused by the deepening crisis.
Source: BNB, IME calculations
The 12 month deficit data on moving average base is more interesting though. After fluctuating around 25-27% from GDP during January 2008, the current account deficit shrunk to 8.5% during January 2010. Despite this serious reduction compared to the starting position two years ago, the deficit stays significant compared to all sort of standards especially given the fact that this deficit most probably corresponds to the crisis bottom. As soon as the capital flows to Bulgaria and the internal consumption recover, the deficit will start to grow again and no wonder if it exceeds 20% in 1.5-2 years.
Whether this should cause concerns about country’s foreign liquidity is another issue. As far as the capital flow is one of the main import sources and the trade deficit respectively, to such an extent the increased import goes hand to hand with bigger capital flow. In this sense, the overall balance of payments (i.e. the sum of the financial, capital and current account, not only the current account) should have been the main starting point when analyzing the country’s foreign position. The overall balance of payments directly reflects the reserve BNB assets change, which in turn support the currency board.
The overall balance of payments for the first month of 2010 was negative (422.9 mln. Euro), which means the BNB currency reserves have decreased with the same value. Compared to January 2009 however we have serious improvement because the balance of payments was more negative (734.7 mln. euro). Apart from the current account deficit in January 2010, we have serious financial account deficit (208.9 mln. Euro). Considering the relative portfolio and other investments improvement, the direct investments balance shows aggravation compared to January 2009. While we have witnessed a direct foreign investments net inflow of 383.8 mln euro in January 2009, this year the number shrunk to 51 mln euro. It is interesting to mention that more than 27% of direct foreign investments inflow in January originated from Greece. This can be explained by the incentive of Greek banks and companies investing in Bulgaria to reposition their funds outside the problematic Greece towards more stable countries showing signs of a crisis passing away (like Bulgaria).
Obviously this year’s direct foreign investments decrease is not good news. Now is the time to figure out how Bulgaria could replace last years’ gargantuan inflow of foreign investments in construction to sustainable investments in other areas such as energy (including green energy), manufacturing and services. As mentioned before one of the options is to achieve this through fast privatization of the state shares in energy and other companies as well as infrastructure objects concessions wherever possible. Apart from attracting fresh investment capital in those companies (whether local or foreign) this will improve their governance and financial results and will have a positive effect on the fisc and the economy as a whole. For now we obviously lack political will for this purpose while the moment is more than appropriate.