The cost of the budget deficit is getting too high
Bulgaria placed external bonds worth a total of EUR 4.35 billion. Distributed in three tranches – an 8-year issue of €1.75 billion, a 12-year issue of US$1.5 billion and a 20-year issue of €1.25 billion, this is the largest debt issuance the country has done in a single go to market. The bond sale was expected in recent weeks, in view of an upcoming debt principal payment in early September and the expected level of the budget deficit for 2024. The record deal will undoubtedly provoke polarised political and expert reactions, but the important thing is to refocus attention on budget balance and the health and sustainability of public finances.
Large foreign debt deals traditionally arouse serious interest in Bulgaria. Most likely because of the accumulation of bitter experiences and macroeconomic failures in the past, public opinion in general as well as large part of the intellectual and expert community remain relatively sceptical about taking on new debt. The macroeconomic framework in the last 20 years, including the functioning of the currency board, also supports this peculiar consensus and the result is that Bulgaria is the country with the lowest debt within the EU at present and “shares” this spot with Estonia and Luxembourg during the last decade. However, somewhat paradoxically, in recent years we have seen a shift in political and expert sentiment, with large budget deficits starting to become the norm – but still, debt is still seen as a bad thing and politically dangerous.
If the news of a foreign debt issue in the range of BGN 8-9 billion, sounds startling, it is good to know now that this will happen next year and beyond. The ceiling on new government debt this year is BGN 11.7bn, and together with domestic issuance during the year we have already taken on over BGN 10bn. Next year the limit is BGN 11.6 billion and in 2026 a further BGN 11.7 billion. Debt is expected to rise from BGN 48 billion at end-2024 to nearly BGN 66 billion at the end of 2026. This is a direct result of forecasted deficit of 3% of GDP for the whole period, or a total of nearly BGN 20 billion in the period 2024-2026, while generating enough cash inflow to repay maturing debt.
The record issuance of foreign debt is one of the first actions of the new (old) caretaker government. Immediately after the elections at the end of October, however, the state budget for 2025 will be adopted and a medium-term framework for the period 2025-2027 will be set. This is the point at which the budget trajectory can be redirected – i.e. the deficit can be shrunk and debt growth tamed. The fiscal goal, as enshrined in the Public Finance Act, should be to achieve a zero or positive balance, and in case of a deficit the Council of Ministers is obliged to propose a medium-term framework with a clear timeframe and steps to achieve a zero or positive balance.
Of course, there is an alternative scenario. It is, in fact, the baseline scenario that would be realized if the policy of bloated spending continues and there is no clear political accountability behind key fiscal decisions. According to the adopted medium-term framework each year until 2026 the budget gap will be in the order of BGN 6-7 billion, public debt will approach 30% of GDP, and interest expenditure will rise from BGN 600-700 million per year in the 2018-2022 period to over BGN 2.3 billion in 2026 and 2027. With this trajectory of public finances, interest expenditure will equal total spending on culture and the judiciary system in the budget.
