The Balance of Payments until May: Conclusions for the New Government

This week was published the data for the balance of payments for the first 5 months of the year. They confirm the tendency, which emerged at the beginning of the year, for decrease of the current account deficit (the good news), but in the same time a significant decrease of the direct foreign investments and capital outflow from the country (the bad news).

In May 2009 the current account deficit is EUR 260,7 million, while in May 2008 it was 789 EUR million. In January – May 2009 the current account deficit is 5,8% of GDP (1971,7 EUR million) compared to 10,5% (EUR 3566,6 million) in the period January – May 2008. The crisis had its effects. The decrease of the trade deficit in the past 5 months compared to the same period last year is not a result of increase of export at the expense of import, but of decrease of export with a smaller rate (30,7% on yearly basis) compared to the decrease of import (33,4% on yearly basis).

The financial account for the first five months amounts to EUR 519,8 million, compared to EUR 4521,9 million in January – May 2008. Foreign direct investments in Bulgaria (which are part of the financial account) are EUR 1133,6 million (3,3% of GDP), compared to EUR 2443,9 million (7,2% of GDP) in January – May 2008, a decrease of 54% in nominal terms for the same period. The decrease of the liabilities on the financial account shows a capital outflow, which is a result not only of the increased risk profile of the country and a withdrawal of financial resources, but also of the expansionary fiscal policy of the government. Not only the government started spending the fiscal reserve in the last months, but also the minimum reserve requirements were reduced from 12% to 10% and to 5% for money, which comes from abroad, as an anti-crisis measure for increased liquidity of the bank system. These actions resulted mainly in capital outflow from the country and decrease of the net balance of the financial account.

We can make the following conclusions based on the balance of payments data:

• As long as the current account deficit is equal to the difference between the savings and the investments in the economy, the decrease of the deficit in times of crisis is a result of less foreign direct investments in the country and a decrease in consumption.
• The worsening of the budget balance (e.g. when a budget deficit occurs) means, that the public savings are decreasing, which leads to a deficit in the current account, all other things being equal (e.g. if they are not compensated with increased private savings or a decrease in foreign indebtedness).
• In the past years the reserves of the Bulgarian National Bank were increasing despite the much bigger current account deficit. This means, that the deficit was not endangering the macroeconomic stability in the country, despite the statements of foreign analysts, which were indicating that. This year, in times of crisis and emerging budget deficit, despite the relatively low current account deficit, the foreign exchange reserves of BNB are decreasing. Exactly here is the vulnerable point of the Bulgarian economy.

The analysis shows that the primary danger for the economy is not coming from the private sector – during a crisis and a withdrawal of investments from the country, the balance of trade has shrunk significantly as expected. This is because the market is elastic and reacts on time to the changing economic circumstances. The danger for the Bulgarian economy comes from the fiscal policy and the interventions of the government. The spendings of the former government in the last weeks before the elections are still not represented in the balance of payments, but exactly they are a threat with respect to the worsening balance of payments and decrease of the reserves of BNB.

The decrease of the reserves of BNB practically means a decrease of the money supply in the economy, which brings to a decrease of inflation. In June the National Statistical Institute reported a monthly deflation of 0,4%, and the average yearly inflation for the first half of the year is 5,1%, compared to 14,1% for the same period last year. Again we see that behind a macroeconomic measure, which is seemingly improving – decrease of inflation – can lie a crisis and a danger of economic instability, not an economic growth.

The analysis of microdata should be done keeping in mind the whole picture of economic development, and what the new government should do in these circumstances is a heavy reduction of government spending and stabilizing of the budget.