Archive for March 3, 2009

Bulgaria heads for ‘soft landing’ this year

Bulgaria seems set for a “soft landing” of its economy this year, experts said, sending signals of stability in contrast to the climate of deep crisis in most economies in east and west Europe. Bulgaria stands out in various ways.

It is the poorest member of the European Union but its gross domestic product (GDP) has grown by more than average in recent years. The effects of the global downturn are certainly being felt: the growth rate halved from 7.0 percent in the first quarter of last year to 3.6 percent by the final quarter.

The government has based its budget for this year on growth of 4.7 percent, which is still high compared with the recessionary trends sweeping many countries in Europe. But others are less optimistic: the International Monetary Fund forecasts a figure of about 2.0 percent, while analysts’ forecasts range from zero growth to 2.0 percent.

At the Sofia-based think-tank, the Centre for Liberal Strategies, analyst Georgy Ganev believes a cooling of the economy “can be actually healthy.”

Credit growth, which had ballooned to 60 percent in 2007, halved to a healthier 30 percent last year, he said. But unlike the situation in countries such as Hungary, credit has not dried up completely. “Banks are still cautiously giving out credits and the interbank lending market remains relatively liquid,” Ganev said. At Societe Generale Expressbank, executive director Philippe Lame said that credit growth of 60 percent and more was unsustainable.

“The crisis is here and there is an awareness of it,” he said. But Bulgaria was “heading for a welcome soft landing,” he said.

Bulgaria is widely acknowledged to be benefiting from lessons learned in its biggest ever financial and banking crisis in 1996-1997 when 14 banks failed. The country introduced a currency board arrangement under the auspices of the International Monetary Fund, thereby pegging its currency, the lev, to the deutschemark and then to the euro at a fixed rate of 1.95583 leva per euro.

This has helped protect the country from a collapse in its currency which would have been disastrous for consumers unable to repay their loans in euros. In addition to the lev-euro peg, the currency board dictates the country’s monetary policy and obliges the central bank to maintain sufficient foreign currency reserves to cover the money in circulation.

The government is also obliged to run annual budget surpluses.

At the end of last year, the Bulgarian central bank BNB had foreign currency reserves of about €12.7bn ($16.16bn) and the government ended the year with the promised budget surplus of 3.0 percent of GDP. This is in contrast to the state of public finances in several eurozone countries which are running excessive deficits.

However, one European economist based in Sofia argued that the budget surplus was not being put to best use. “It’s actually counter-productive because the centre-left government is using it to finance social measures ahead of the next elections (in July), not to create wealth,” said the economist, who asked not to be named.

In order to buffer the economy against the crisis, the government is planning to invest about 15 billion leva (€7.5bn) into infrastructure projects, and salary and pension increases.

By contrast, Bulgaria’s balance of payments on current account showed an increased deficit of 24.3 percent of GDP, reflecting heavy consumer demand for imported goods. And direct foreign investment, which amounted to around one-fifth of GDP in recent years, more or less covering the current account deficit, has dropped substantially.

Banks are now competing fiercely to attract deposits, offering annual interest of as much as 8.0 percent. “But Bulgaria is no off-shore paradise,” said Lame at Societe Generale Expressbank.

Former deputy finance minister and current industry chief, Stamen Tasev, argues that the substantial size of the underground economy—equivalent to around one third of GDP—poses a further obstacle to foreign investment.

“It is a fertile ground for corruption,” he said, pointing to sectors such as the construction industry in particular.

Corruption is rife in Bulgaria and prompted the European Commission to freeze more than €800m in subsidies last year.

Bulgaria wants Euro

Bulgaria is doing everything it could to join the eurozone, considered a kind of a Noah’s Ark in the times of financial crisis, Monday.

On Sunday Bulgarian PM Sergei Stanishev told his EU colleagues that Bulgaria wants to join ERM II – a ‘walk-in’ to the eurozone. According to him the country meets four out of the five Maastricht treaty criteria for euro entry.

The one criteria Bulgaria doesn’t meet is inflation rates, where , according to PM Stanishev, the country is making major progress. Some experts however have commented that as Bulgaria’s national currency, the Lev, is pegged to the Euro the country’s economic growth and increase of incomes is registered as inflation.

Adopting the Euro is a much-touted remedy for the financial crisis in the East European member-states, the Economist wrote before the meeting. According to the weekly it might make sense for the four countries with exchange rates pegged to the euro: the Baltic trio of Estonia, Latvia and Lithuania, plus Bulgaria, to adopt the common European currency.

None of these countries will meet the Maastricht treaty’s criteria for euro entry any time soon. But they are tiny (the Baltics have a population of barely 7m), so letting them adopt the euro ought not to set an unwelcome precedent for others nor should it damage confidence in the single currency, the Economist writes.

Bulgaria should have filed a request to join ERM II, says Vladimir Karolev, economic expert in NDSV, a member of Bulgaria’s ruling three way coalition, told Focus News. According to him Bulgaria must ask for reduction of the inflation criteria together with outside experts who think alike.

Bulgaria will also try to enter the eurozone with the same exchange rate between the Lev and the Euro as it is nowadays ( 1.95583 to one). This, he says, will send a positive signal to investors.