Good news from the balance of payments

Recently, the Bulgarian National Bank (BNB) released balance of payments data for the second quarter of the year. These data are preliminary and any analysis based on them may not be precise and the conclusions made may not be absolutely correct. Anyway, as these are the only available reliable source data, we should use them.

Analyzing the balance of payments we should consider first the financial account that reflects the inflow and outflow of capital in the country. One of the most important indicators which is closely connected to the economic development of the country is the foreign direct investment (FDI). During the second quarter of 2004 its size is EUR 628.6 million and from the beginning of the year it is total EUR 978.6 million. These values are historically high during the period balance of payments data series are collected and represent over 5% of Agency for Economic Analysis and Forecasting projected gross domestic product (GDP) for 2004. The positive development of FDI is confirmed by the estimations of the Bulgarian Investment Agency, which stated that FDI inflows would reach USD 2 billion until the end of 2004. Probably, this forecast may be exceeded if the privatization of electro redistribution companies is completed as it is planned.

Of course, it should be mentioned that FDI reporting is not correct enough as it includes privatization receipts. Actually, the privatization is not an investment but it is only a change in ownership of particular property to a foreign resident. It is natural to expect that this property transfer will generate real investment in the country but with a lag and the size of this subsequent investment would differ from privatization price that is reported in the official statistics. For example, the Bulgarian Telecommunication Company sale was made in the second quarter and contributes significantly to the increase of the direct investment in equity recorded in the latest data.

As a whole, the financial account balance for the first half of the year reaches EUR 1469.6 million, which is a growth of 48% compared to the same period in 2003. Thus, the sum of current and financial account is positive with level of EUR 523.1 million.

Logically, the persistent trend of rising net capital inflows to the country causes higher levels of disposable incomes for the Bulgarian citizens and companies in foreign currency. That supposes higher demand for either locally produced or imported goods and services. As Bulgarian companies are not able to satisfy the higher demand and some items like automobiles are not produced in Bulgaria at all the import continuously rises and its growth during the period is about 17%.

Import structure is relatively stable and the share of investment goods is around 25%. However, the import of these goods increased rapidly in the second quarter of 2004 reaching EUR 1350.9 million and the growth relative to the same period in 2003 is above 111%. This indicates increased investment activity and supposes that there should be higher productive efficiency and higher competitive power on the international markets. It is possible that this could not influence the export as some part of these investment goods is used in the non-tradable sector of the economy – i.e. goods that are not object of external trade. On the other hand, cheaper or higher quality goods and services that are result of these investments would lead to higher utility and real incomes for the Bulgarian citizens and companies and they could expand their consumption or savings.

The tendency in current transfers is holding during the period and they rise to a level of EUR 351.4 million – EUR 93.6 million higher than in 2003. Money transfers from Bulgarian citizens living abroad – about 85% of all transfers, and revenues from the European Union programs – about 11%, mostly determine them.

Net income from abroad rises relative to the previous year when it was negative with EUR 320.2 million to EUR -169.2 million. The reason behind this is the smaller size of investment revenues outside Bulgaria and particularly the direct investment revenues.

Another indicator that realizes significant growth during the first half of the year are the foreign exchange reserves of the BNB. Their absolute increase is EUR 782.8 million which is also historically high value for such period. These reserves indicate the confidence in the currency board and the fixed exchange rate of the lev to the euro and the ability of the BNB to meet its obligations in this direction.

To summarize the above-mentioned facts and conclusions, the Bulgarian economy is running well and the balance of payments data confirm this positive tendency.