Can Bulgaria avoid asking for IMF help?

By bne IntelliNews May 21, 2009

Nadia Damon in Sofia -

With the news that Romania has been granted an almost €20bn International Monetary Fund-led bailout package, neighbouring Bulgaria's own economic situation is now increasingly coming under the microscope.

In mid-May, data showed that the Bulgarian economy shrank by 3.5% on year in the first quarter after growing by a similar amount of 3.5% in the fourth quarter. And in recent weeks, political opponents - most notably the former prime minister, Ivan Kostov, who heads up the DSB (Democrats for a Stronger Bulgaria) opposition party, have been calling on the Socialist-led coalition government to get a handle on the financial crisis, claiming that Bulgaria is on the verge of requiring similar assistance.

But with national elections set for July, such rhetoric is only to be expected - as Bulgarian PM Sergei Stanishev has been quick to point out. He maintains that the country is doing more than enough to maintain its fiscal reserves and has scotched any talk of Bulgaria following in the footsteps of Hungary, Latvia and Romania in having to approach the IMF.

In its Global Financial Stability Report, released in April, the IMF acknowledged that Bulgaria's public finances are in surplus and the balance sheets of the central bank and the government enjoy "strong buffers." The Fund has also since admitted that the external debt financing figures for Bulgaria were not as bad as it gave in the original report, cutting those requirements to 132% of reserves from 188%, though Fitch Ratings in mid-May said the scale of external financing means it still believes there is a "reasonable likelihood" that Bulgaria, along with Croatia and Lithuania, will seek IMF-led programmes to "help meet potential financing gaps and give breathing space for necessary adjustment to take place."

Budget pruning

The IMF also maintains that the cabinet's current approach to budget cuts (the decision was taken in December to limit spending to 90% of the originally agreed amount) isn't aggressive enough and is urging the government to take greater steps to prevent an erosion of its precious fiscal reserve account and maintain confidence in the currency board, which pegs the lev to the euro.

The IMF, which worked with the World Bank and EU in putting together the package for Romania, estimates that the current level of Bulgarian spending will result in a deficit of about 1% of GDP for 2009. It also projects a 3.5% GDP decline in 2009 and a further 1% contraction in 2010, due to falling net capital inflow and shrinking export and import volumes. The European Bank for Reconstruction and Development said in May it reckons that Bulgaria's GDP growth will shrink by 3% this year and a further 1% in 2010.

Bulgarian Finance Minister Plamen Oresharski appears to share the IMF's concerns, and has reportedly asked the cabinet to impose more radical measures on the back of his department's figures for March, which showed that Bulgaria's fiscal reserves (which the country is required to maintain as part of its currency board agreement) fell by 4.2% to BGN7.95bn (€4.06bn) that month.

However, Tsvetoslav Tsachev, chief analyst and head of the research at Sofia-based Elana Trading, argues that the government's 2009 budget - based on 16% tax revenue growth - isn't overly optimistic. And while it's true to say that the credit crunch certainly took Bulgaria's leaders by surprise, he adds that the prudent policies of recent years mean that the country should be able to navigate its way through the crisis. "We have developed at one step behind these other countries in Eastern Europe and we are underdeveloped in many areas including banking system which is more conservative compared to others in the region," Tsachev states, something he claims is now working to Bulgaria's advantage. "We have less leverage than the Western banks, so I do not think we will have the same problems - in terms of banking credit, for example. We will have some, but not as many."

Tsachev also insists the IMF, along with the World Bank, is painting too bleak a picture of Bulgaria, as well as Romania. "I don't exclude the possibility that problems will arise if interest rates continue to rise and inflation becomes high," he says. "We have a huge current account deficit and it will decline, but we know that part of this current account deficit is due to large capital influx and investments, which is good."

"We have seen some fluctuation in consumer demand, electronics, large products, but this will not affect the Bulgarian economy as much as it affects others. We are still a very poor country compared to the average one in the EU, but the average Bulgarian will continue to consume in a way that will guarantee some good revenues in terms of VAT and excise taxes, so while the budget will be under some pressure, it will not match that being seen in Germany or the US, for example. There are some very serious problems, but they will not be so severe that they require the government to take some extreme measures."

Essentially, while it's still a case of weathering the storm, Tsachev points out that large and liquid publicly-listed companies have continued to do steady business with even 30-40 % lower revenues in the first quarter (something he partially blames on the lower price of materials), ensuring the majority still made a profit.

Bulgaria's banks have also raked in huge profits during 2008 - which Tsachev says they are now harnessing for capital. "They will use it to lend more money in the future," he states, "which is why I think the Bulgarian economy will emerge stronger and that the problems here are not so severe. They will not derail the economy or create industries that need bailing out."

While Bulgaria's past experiences may help guide it through the current crisis, both the IMF and analysts agree the country will need all the EU funds on offer to compensate for the downturn. But, crucially, the release of these funds is still dependent on the country's effectiveness in the fight against corruption. "We need to see a huge improvement in this area," Tsachev concedes. "If we are fruitful, then we will receive more funds and this will be able to plug the current account gap, something that will mean that we won't have any problems in the mid-term. We are a small economy, so several billion euros will make a lot of difference."

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