Throughout the past year, macroeconomic news on Bulgaria, both domestic and international, was full of persistent warnings about the soaring current account deficit and inflation. The latest macroeconomic report from Bulgarian National Bank (BNB) on Bulgaria's macroeconomic performance did not seem to deliver fresh news but did emphatically bring the warnings home.

In its preliminary full-year report for the past year, BNB said that the current account deficit had increased to 6.175 billion euro, a 57 per cent year-on-year increase from 3.935 billion euro in 2006. This meant that from 15.7 per cent of GDP in the previous year, the current account gap reached an all-time high of 21.6 per cent of GDP in 2007.
International media said that that the trend for the widening of the CA gap had accelerated in the latter months of the year. In December alone, the deficit rose by 100 million euro, compared to the same month in 2006, to 905.5 million euro.

Recently, Fitch, an international credit rating agency, downgraded the outlook of the sovereign credit rating from neutral to negative, primarily because of current account deficit concerns. It had based its decision on a forecast for a deficit of 19.5 per cent of GDP.

The main factor behind the growth in the deficit of 1.857 billion euro, the BNB said, was the soaring trade balance gap. The gap was now 3.164 billion euro. Imports grew by 18.7 per cent year-on-year to 20.8 billion euro, while exports only increased by 11.7 per cent to 13.4 billion euro.

Even though it reached a record high, the news about the current account deficit did not surprise local government officials and analysts. The non-alarmist view was that nothing in the composite structure posed risks to the economy and that the economy had the substantive buffers needed to weather external shocks.

Analysts argued that the main imbalance stemmed from the rising trade turnover, which was welcome news to any economy with growth ambitions. In an interview with Dnevnik daily, Hristo Vulev, an investment analyst at Karoll brokerage, pointed to the positive correlation between, on one hand, the country's economic growth, the accrual of investment capital and the growth of consumption as a result and, on the other, the increase in revenues and positive expectations for future income.

He said that growth of the current account deficit largely came as a result of Bulgaria's capacity to attract foreign capital, in the form of foreign direct investments (FDI) and loans.

"The growth of the current account deficit came hand in hand with the inflow of foreign capital and, indirectly, the stable growth of BNB foreign exchange reserves," Vulev said.

Finance Minister Plamen Oresharski called for calm in view of the Bulgarian Government's policy oriented toward fiscal discipline and stability. He cited fast economic growth and increasing domestic consumption as factors in the current account deficit and named the strict fiscal policy and the growing foreign currency reserves as the Government's cushions against a fiscal crunch. Last year alone, the reserves rose by 2.908 billion euro.

According to Vulev, the current account deficit would only pose a risk if it cut the foreign exchange reserves of the country; however, he did not see any signs of that.
Government forecasts were that foreign exchange reserves would sustain the same growth trend, by 28.3 per cent to 12.150 billion euro.

Analysts said that it was not the current account deficit but rather the all-time high of FDI that was the surprise. For the first time in nine years FDI did not fully cover the current account gap. Last year, the volume of FDI was 5.687 billion and accounted for 92 per cent of the current deficit and 19.9 per cent of GDP. In 2006, FDI, at 4.364 billion euro, covered 111 per cent of the current account gap and was 17.4 per cent of GDP. The deteriorating coverage would have a more tangible effect in the medium and long run.

"The worse coverage this year brings no immediate risks to the economy, especially in light of the fact that the country's foreign debt is no longer large and only a third of it was short-term," Vulev said.

Amid all calm domestic arguments, foreign analysts said that the countries with poorer macroeconomic fundamentals were likely to be the first to feel the impact of more cautious lending and investment internationally. Tightened liquidity on international markets was a trend that had already emerged in the aftermath of the global sub-prime mortgage crisis. Many foreign analysts believe 2008 will help estimate the scale of liquidity contraction for the medium term but they are certain that the worst hit would be countries with imbalances.

Bulgaria is present on several blacklists, for its current account deficit, inflation, credit exposure and disparity between demand from solvent buyers and production.

A report issued on February 18 saw Bulgaria fare worse than its regional peers in terms of the degree of development of its market economy and democracy. In the benchmark analysis for 125 countries in transition, German foundation Bertelsmann rated Bulgaria as the poorest European Union member state. It said the main task of the Government should be to change this condition and  ensure sustainable growth.

Furthermore, some analysts warned that the renegotiation of prices for energy resources will add another two per cent of the GDP to the trade deficit, which - as already mentioned - had been the main catalyst behind the growing current account gap.

With all analysts saying that the poor current account deficit will not effect the economy immediately but at a later stage, new government "cushions" should be added to ensure the economy does not overheat, as some economists predict.