Facebook Economics

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Wednesday, February 13, 2008

Bulgaria Inflation and CA Deficit January 2008

Bulgaria's inflation rate was unchanged in January as food and fuel prices stayed put. The inflation rate remained at 12.5 percent, the National Statistics Institute said in a statement today. Consumer prices rose 1.4 percent on the month, following an advance of 1.1 percent in the previous month. The EU Harmonised CPI was up 11.7% year on year in January.

Transportation costs, which include gasoline prices and make up 17 percent of the consumer-price basket, rose 2.6 percent in January, compared with a gain of 1.3 percent in December. Food prices, which account for 35 percent of the consumer-price basket, rose 2.1 percent, after a 1.6 percent increase in December. Shoes and clothing prices fell 0.6 percent in the month.

Widening CA Deficit

Bulgaria's 2007 current-account deficit widened to a 10-year record of 21.6 percent of GDP as imports surged in the first year of the Balkan country's European Union membership.

The 12-month deficit widened to 6.17 billion euros ($9 billion) last year from 3.9 billion euros in 2006, when it was 15.7 percent or GDP, according to data released by the Sofia-based central bank today. The gap expanded to 905.5 million euros in December, after a revised 725.3 million euros in November.

Access to the European single market and cheap lending have fueled consumer demand and imports after the country joined the European Union a year ago. The government, which expects the shortfall to be covered by foreign investment, wants to boost living standards and bring its $31.5 billion economy to EU levels.

The trade deficit widened 27 percent to 7.4 billion euros in last year, the central bank said. Annual exports rose 10.4 percent to 13.4 billion euros, while imports grew 15.6 percent to 20.8 billion euros.

Foreign direct investment in 2007 also reached a record of 5.7 billion euros and covered 92 percent of the current-account gap, the data showed. A year ago, 4.4 billion euros of FDI covered 111 percent of the deficit. The 2007 financial account almost doubled to a 9.4 billion-euro surplus from 5.2 billion euros in the previous year.

Overheating and Risk of Correction

``Strong economic growth has been accompanied with signs of overheating, increasing macroeconomic imbalances reflected in a widening external deficit, re-acceleration of bank credit growth,'' the European Commission said in a Feb. 13 report assessing Bulgaria's economy. ``Safeguarding macroeconomic stability'' requires continuation of tight fiscal policies, according to the commission.

Fitch Ratings on Jan. 31 lowered its credit rating outlooks for both Bulgaria and Romania to negative from stable, citing deteriorating economic imbalances in the two nations.

Bulgaria's record current-account gap and high lending growth have raised chances the economy may be hurt by ``external shocks,'' according to Moody's. On Feb. 5. It raised the Bulgaria's ``vulnerability'' to "medium" from "low" in February 2007.

Bulgaria is in a very similar position to the three Baltic states, since the currency - the lev is effectively pegged to the euro, so there is no way the currency can adjust to take up some of the tension created by the very high internal inflation. Meantime a declining population, long term lowest-low fertility and heavy out migration have left the countries rapidly growing economy extremely short of qualified workers, thus producing pressure to send wages onwards and upwards in ever increasing second round effects. The only real measure available to the Bulgarian government in this situation if the fiscal one, and the government has planned a budget surplus of 3 percent of GDP for this year in an attempt to drain liquidity from the economy. However given the size of the problem, its deep structural character, the availability of credit at rates of interest well below the annual inflation rate and the heavy stream of remittances from migrant workers strung out across the EU, it is really hard to see anyone getting a grip on this increasingly anarchic situation. However, given the presence of the currency pegs, I think it unlikely that the East European adjustment process will kick off in either the Baltics or Bulgaria, and my guess is the most probable initiator of the next stage of the process will be Hungary, and if not Hungary then Romania. Once the process gets under way, then the other aforementioned countires will - unfortunately - be left with no other alternative but to fold their ever more untenable positions.

Political Uncertainty

Of course, it is only to be expected that these growing economic tensions will find their reflection in the political process, and in this sense the news that Bulgaria's parliament is to hold a no-confidence vote in Prime Minister Sergei Stanishev's coalition government next week over allegations of corruption should not come as a surprise. The vote is purely symbolic at this moment, since the governing parties command a strong majority. It is however symbolic of the political uncertainty which can now get a grip on countries with major underlying structural imbalances like Bulgaria.

Five opposition parties introduced the no-confidence vote motion in parliament yesterday, saying the two year-old Cabinet had failed to fight rampant graft and curruption. Prior to its EU entry on Jan.1 2007, Bulgaria was repeatedly urged to deal with top-level corruption.

``The Cabinet's corruption inflicts severe damage on Bulgarian citizens and undermines Bulgaria's authority as EU member,'' the text of the opposition motion reads ``The government creates corruption on all levels.''

This is the fourth no-confidence vote in Stanishev's government, and comes after a Feb. 4 European Union report criticizing Bulgaria for not showing ``convincing results'' in tackling corruption among senior government officials and fighting organized crime.

The EU suspended payments of 250 million euros for three road-construction projects January, after two company officials were arrested on suspicion of bribery. The commission asked the EU anti-fraud office to investigate whether the officials were involved in distribution of EU funds. The EU has earmarked subsidies of 11 billion euros for Bulgaria through 2013.

A corruption perception index published by Transparency International, a Berlin-based anti-corruption watchdog, placed Bulgaria 64th last year, on a level with Turkey and Croatia, and between Poland in 61st position and Romania in 69th. Countries with lowest levels of corruption such as Denmark top the index.

The opposition parties sponsoring the bill include the Democrats for a Strong Bulgaria, United Democratic Forces, Bulgarian People's Union, Attack, and Bulgarian New Democracy, as well as some independent politicians. However the parties can only muster a total 80 seats in parliament compared with the government's 151 seats so the motion as such is unlikely to prosper, unless some of Stanishev's coalition partners start to waver. Stanishev leads a coalition of the Bulgarian Socialist party, the Simeon II National Movement and the ethnic Turk Movement for Rights and Freedoms.

No comments: