Industry Watch: Bulgaria's Budget Deficit Might Worsen over Elections

Bulgaria's fiscal reserve might be depleted further over the upcoming elections, according to Industry Watch. File photo

Bulgaria's budget deficit and fiscal reserve might be affected negatively by the presidential and local elections in the fall of 2011, according to Industry Watch, a Sofia-based consultancy.

According to a new non-periodical report of the think-tank, the elections will create pressure for increased state spending, therefore, a scenario of worsening budget deficit and a further depletion of the fiscal reserve, should not be ruled out.

"The European Union is the main trade partner of Bulgaria so the Bulgarian economy follows in the footsteps of the EU market recovery. At the end of 2010 the GDP of Bulgaria started recovering gradually but it was only export-driven. At present it is of utmost importance whether Europe is steadily leaving the crisis behind or a relapse is on the way, that is, the so-called double-dip recession for the EU as well as for the USA," Industry Watch says in its report unveiled on Sunday.

"The investments and the private sector lending are still ailing in Europe. Given this circumstance we should also consider that the EU governments added to the state debt more than EUR 2 T by direct bank subsidies and financial bail-outs. The withdrawal of the financial stimulus might drag the European economy back into recession, whence Bulgarian exports could become less demanded."

The consultancy analysis further points out that in a scenario of debt crisis resumption there will be new repercussions in the financial sector. If that happens, the foreign individual and institutional investors' appetite for investments in Eastern Europe will fall.

"In Bulgaria the decreased budget deficit indicates possible stabilization of the fiscal policy and reduction in the political risk as well as in the risk for the monetary regime. Yet it is to bear in mind that the government is too dependent on the inflationary dynamics (which is out of its control) to put enough revenue in the coffers. Till now the government has been cutting capital costs, but it might not suffice for a balanced budget. The upcoming elections will exert pressure for more spending. This is why we don't rule out the possibility for a budget deficit worsening yet, whence a sharp decline in fiscal reserves might follow.

"The main rationale for the fall in investments in Bulgaria is the inert foreign capital inflow. The foreign direct investments have plummeted from 9 billion euros in 2007 to 1.6 billion euros during the 12-month run-up to March 2011. The net flow of foreign direct investments is still positive, but the banks are paying off their net liabilities because of the weak domestic demand for loanable funds. The plunge in the foreign investments accounts for the small increase in the economic activity by 0-1% yearly despite the spurt in the export-oriented industries," Industry Watch concludes.

In April 2011, Bulgaria registered a monthly surplus of BGN 190 M, the second month in a row with a positive balance, the Finance Ministry announced.

The April surplus appears to have resulted from the contribution of BGN 200.9 M of the Bulgarian National Bank (BNB) to the state budget, which is a leftover from BNB's 2010 surplus. Meanwhile, Bulgaria's fiscal reserve appears to have been depleted further.

In March 2011, Bulgaria's budget registered a surplus of only BGN 8 M.

In the first four months of 2011, however, Bulgaria's budget deficit amounts to BGN 552 M, or 0.7% of the projected GDP.

As of April 30, 2011, Bulgaria's fiscal reserve stood at BGN 4.7 B, a decline of BGN 400 M in just two months.

Bulgaria's fiscal reserve amounted to BGN 5.1 B as of February 28, 2011, a decline of BGN 300 M.

Bulgaria's fiscal reserve stood at BGN 5.4 B at the end of January compared with BGN 6 B at the end of December 2010.