The level of the current account deficit (CAD) in Bulgaria seemed to be the main factor of concern expressed by various external analysts towards the state of the country’s economy.

This concern was expressed by Fitch Ratings Agency on January 31 when Bulgaria’s, Estonia’s, Latvia’s and Romania’s outlook was revised to negative from stable for their long-term foreign and local currency issuer default ratings.

Bulgaria’s CAD was estimated at 19.5 per cent of the GDP in 2007 by Fitch while the Government projection was 21 per cent.

The current account deficits in those four European Union member states had risen to levels that looked “disconcertingly stretched by current global or historical standards”, Fitch said. Moreover Edward Parker, head of Emerging Europe sovereigns at Fitch was quoted as saying that “external deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The negative outlooks reflected the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment”.

The same day Fitch announced its decision to revise Bulgaria’s outlook, the World Bank published its EU8+2 Regular Economic Report. It had similar findings to Fitch. “The current account deficits had stabilised in the Baltics but were still widening in Bulgaria and Romania.”

According to the report, the CAD represented the greatest vulnerability to deteriorating international conditions and was particularly worrisome for those countries with high levels of foreign currency debt. “The external imbalances may come down in line with slower GDP growth expected in the Baltic States in 2008, but in Romania and Bulgaria there was little prospect of a turnaround in the near future.” Foreign direct investment coverage of the CADs varied across the region with full or substantial coverage in Bulgaria, the Czech Republic, Poland and Slovakia, but there was higher reliance on (debt) portfolio flows (Hungary) and other loans (the Baltic countries, Slovenia and increasingly Romania), the World Bank said.

As for the popular subject of how the US mortgage crises had affected the economies of the new EU countries, the World Bank said “the fundamentals for the EU8+2 had not changed, although the level of uncertainty had risen. Globally, a prolonged period of lower risk appetite was likely, along with continuing volatility as reflected in sharp swings in virtually all equity markets. This will be challenging for the EU8+2, and the soundness and credibility of policy frameworks will be appreciated by market participants. However, with the exception of higher-than-expected inflation, the remaining economic fundamentals in the EU8+2 remained broadly unchanged. GDP growth was still robust, but concerns remained for those countries where large current account gaps persisted”.

Ron Hood, a lead economist at the World Bank and the principal author of the report, pointed out that people should look beyond the immediate market fluctuation to see the bigger picture. “The ability of the EU8+2 so far to withstand the global turbulence was attributable to several factors. Their bankers were not as exposed to the sub prime market. Their economies were linked more directly to the EU than the US. While credit had increased rapidly, private borrowers were under-leveraged to start with.” Moreover, with the possible exception of Bulgaria and Romania, the most exposed countries were beginning to adjust. The report also said that with an expected global slowdown, exports may lessen as a driver of growth, and fiscal adjustments would be needed to bring domestic demand under control.

Such an attempt to respond to the turmoil of the US and European financial markets was announced by the Association of Banks in Bulgaria (ABB) on January 30. Violina Marinova, deputy chairperson of ABB, was quoted as saying that banks were expected to raise their loan interest rates. “There would be about a 0.5-0.7 per cent increase in the interests on loans during the next month,” Marinova told reporters. The increase was necessary, as there were not enough resources for the banks to maintain their credit activities, she said. Such an increase would by no means be something new since interest rates on household and corporate deposits in Bulgaria increased to four per cent and 4.04 per cent, respectively, in December 2007, according to a Bulgarian National Bank (BNB) report on the condition of the banking system.

Some banks even raised the deposit rates to eight, nine or 10 per cent. The largest increase last December, in absolute terms, was reported by loans and receivables (including financial leases) and was 5.9 billion leva, followed by cash and cash balances with central banks, BNB said.

In December last year, gross loans and advances reported a three-month-long growth of 15 per cent and were at 45.9 billion leva, BNB said. System-wide, loans to business had increased by 3.2 billion leva. “Retail exposures saw a 1.5 billion leva growth, and claims on credit institutions a 1.2 billion leva growth. Housing mortgages and consumer loans increased by similar amounts,” BNB said. Growth was the key word in the report. “At the end of December the total assets in the banking system was 59.1 billion leva and in the fourth quarter of 2007, a 7.2 billion leva (13.8 per cent) increase was reported, with 4.1 billion leva of growth in the last month of the year. Within a one-year horizon the banking sector assets increased by 16.9 billion leva or 40 per cent.”

Despite the concern expressed at the level of loans in the country, the greatest asset banks in Bulgaria have is the fact that the majority of them are owned by leading EU banks. This fact alone served as a strong enough guarantee for their stable performance and could be taken as one of the findings in another publication of Fitch’s, published on February 4. Fitch said it had changed the outlooks of Eurobank EFG Bulgaria (Postbank), Economic and Investment Bank and Allianz Bulgaria from stable to negative as a result of revising Bulgaria’s outlook in the first place. However Fitch also said it had affirmed the ratings of the three banks on their previous levels reflecting “extremely high probability that support from their foreign parents would be forthcoming in case of need”.