VZCZCXRO7568
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSF #0360 0751123
ZNR UUUUU ZZH
R 161123Z MAR 07
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC 3417
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SOFIA 000360 
 
SIPDIS 
 
DEPT FOR EUR/NCE MNORDBERG 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EINV BU
SUBJECT: BULGARIA'S CURRENT-ACCOUNT DEFICIT WORSE THAN EXPECTED, BUT 
NO CAUSE FOR ALARM YET 
 
 
¶1.  (SBU) SUMMARY:  Bulgaria's Current Account (CA) deficit exceeded 
even the gloomiest expectations, coming in at 16 percent of GDP 
growth in 2006.  The deficit was fuelled mainly by the growth of the 
foreign trade gap which increased to a record 21.8 percent of GDP 
last year.  Strong export growth performance and foreign direct 
investment (FDI) inflows were the few bright spots in the picture. 
Both the GOB and independent analysts assert the CA deficit is not a 
problem as it has grown on the back of strong investment activity. 
The GOB is committed to continue fiscal discipline and to new 
structural policies that curb further expansion of the CA deficit. 
END SUMMARY 
 
¶2.  (U) Bulgaria's CA deficit reached a record 16 percent of GDP 
growth in 2006 (USD 4.9 Billion), preliminary central bank figures 
showed.  The new deficit is well above the previous two years - 11.3 
percent or USD 3.0 Billion in 2005, 5.8 percent of GDP or USD 1.4 
Billion in 2004 - and much worse than the most pessimistic 
projections of 15 percent for 2006.  The deficit was exceptionally 
strong in December - increasing 85 percent year-on-year - on strong 
consumer goods imports in advance of the hike in some excise taxes 
on January 1, 2007.  Through the year, the CA deficit continued to 
be fuelled mainly by the growth of the foreign trade gap which 
increased to a record 21.8 percent of GDP in 2006 (against 20.2 
percent in 2005).  Rampant domestic consumption due to a booming 
economy has supported high import growth over the past few years, 
while domestic export capacity is still inadequate reflecting 
domestic industry's resistance to restructuring. 
 
BRIGHT SPOTS BEHIND THE CLOUDS 
 
¶3.  (U) A strong export growth rate of 26.6 percent year-on-year was 
a positive sign last year and outpaced for the first time in many 
years the growth of imports at 25.3 percent.  Robust FDI inflow 
supported a favorable financial account, while foreign exchange 
reserves covered over 5 months of last year's imports.  FDI, which 
reached USD 4.9 Billion or 16.6 percent of GDP in 2006, was mainly 
in real estate, construction, and communication - not strong 
export-growth sectors. 
 
¶4.  (SBU) Neither the government, nor the independent analysts we 
spoke to are worried about the rising CA deficit as long as it 
remains largely or fully covered by FDI - 104 percent in 2006.  Both 
sides contend that the rising FDI is causing a subsequent increase 
in the import of investment goods, which is good for long-term 
economic development but worsens the foreign trade and CA balance. 
At the same time, a large portion of the imported raw materials and 
energy resources - 50 percent and 35 percent, respectively - are 
used in export-oriented production. 
 
GOB GETS TOUGH ON CA DEFICIT 
 
¶5.  (U) For the first time this year, the GOB included future CA 
deficits as a yardstick to control fiscal spending.  The GOB will 
not spend the last 10 percent of its budget if the expected 2007 CA 
deficit as of end-September 2007 is higher than last year's 16 
percent of GDP.  The GOB's tight fiscal stance also entails cautious 
public spending on imported goods - consumer and investment mainly - 
to avoid further opening of the CA gap.  The central bank's vigilant 
policies on domestic credit growth should ensure the growth of 
private consumption remains under control, too.  On the supply side, 
the GOB is relying on EU aid to modernize industry and its export 
capacity, while a law on small and medium enterprises supports 
measures to encourage export-led production. 
 
IMF CAUTIOUS 
 
¶6.  (U) The IMF estimates that the CA deficit in 2007 will remain as 
high as last year's - around 15.8 percent.  The Fund argues that 
certain favorable industry performance - such as the steel industry 
- may have an upbeat effect on overall exports in 2007.  The Fund 
has been a steady beacon warning the GOB against lavish budget 
spending and further widening of the CA deficit, and will continue 
this message even after it exits at the end of March. 
 
¶7.  (SBU) COMMENT:  The CA deficit is very high, but government and 
banking officials claim that because of high FDI levels, and 
security of the banking system, Bulgaria is not in danger.  If the 
CA deficit is to widen further - or FDI to fall - it could 
jeopardize the currency board arrangement and the government's 
mid-term economic plans.  While Bulgaria's exports will likely 
continue to rise, export volume will largely depend on how quickly 
the domestic economy is able to compete following EU membership. 
The government should stick to its tight fiscal policies - yielding 
a fourth consecutive budget surplus - and put in more structural 
reform measures to maintain the strong economic climate while 
significantly re-building business-related infrastructure. 
BEYRLE