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Are there “external risks” according to the balance of payments’ data
submited on 23.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 23.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
In the Budget 2008 statement the government declared its intentions to defend the economy from “external risks” via fiscal means. This is not a new understanding, although popular analyses and releases are focusing almost entirely on the current account deficit in the balance of payments. We must however tell the difference between the real dangers of external shocks from indicators, reflecting structural changes in the economy. As external shocks we can determine sharp changes in prices of internationally traded goods – mostly fuel and basic resources. As of the current moment for example the Bulgarian economy receives negative incentives with the rising prices of energy sources, but positive – with the metals’ price growth. The ability of economic agents to cope with these shocks determines also the level of flexibility of the economy as a whole. Another type of external shock is change in the monetary policy – both in the USA, and (even more) in the Euro area. With the relatively liberal investment regime the low interest rates on a global scale stimulate domestic credit growth and vice versa.
If we must give an example for policy, which directly influences the effects of such external changes, these are the measures of BNB, aiming at restricting bank credit. They act as a “cooler” of the otherwise loose in recent years monetary policy of the European central bank (whether it is necessary is a matter of another discussion). Far much more attention however is dedicated to the indicator “current account deficit”. Whether to simplify or due to unwillingness to further deepen in theoretic analysis, it is considered to be a universal measure of the state and perspectives before a given economy.
There are two situations, in which the high current account deficit could really be an indicator of a forthcoming crisis. The first is when it is financed via emission of public debt. Because no country can borrow infinitely, at a certain point the debt could not increase further, the government falls into insolvency, and paying back old debt leads to raising tax burden on business and citizens. The second situation envisages artificial maintenance of high exchange rate of the domestic currency, impeding export and stimulating import. This would inevitably result in reserves’ outflow and at a certain point in time – to “attack” against the currency and change in the exchange rate.
Bulgaria is not in any of the above-described situations. The government is not accumulating debt, but what is more – it pays out old debt. The debt burden below 20% of GDP is among the lowest in the world. In the same time the BNB monetary policy is restricted in the currency board regime, which has full (even considerably exceeding 100%) coverage of the domestic currency with reserves in euro.
The statistics, if viewed in its integrity, confirms the stated so far. The current account deficit is increasing by 75% in 9 months (relative to the same period of 2006), but the financial account surplus is growing at 98%. Even foreign investments alone are higher than the current account deficit. The total balance of payments is positive, which means that the currency inflow in the country is exceeding outflows. In fact this is a never-changing in recent few years, as we even find certain proportionality in the pace of growth.
Many analysts point as risk the large share of direct investment in real estate. In 2007 it is about 38%, as compared to 35% in 2006. The suggested risk lies in the fact that this inflow may cease and then investments as a whole will decline. On one hand, even if this happens this would mean a partial contraction of businesses, serving real estate – construction, maintenance, transportation – without however to reasonably expect a systematic (or total) problem with other sectors. On the other hand, the sole fact that a particular location is attractive for investments does not necessarily mean that it will cease to be such in the near future. In other words, if Bulgaria improves its quality of life, infrastructure and communal services, it would stay a likeable place for living, vacation and investment in the future, as well.
Finally we must also point at the fact that external investments in processing industry in fact cease in 2007. To some this might be an indicator of loss in competitiveness. But the happening might be interpreted also as a reallocation of business toward sectors with higher value added, i.e. opportunities for new enterprises in labor intensive sectors, based on cheap low-qualified labor. And this is moreover positive news – it is not surprising that export but do not attract investment in the processing industry.
If we must give an example for policy, which directly influences the effects of such external changes, these are the measures of BNB, aiming at restricting bank credit. They act as a “cooler” of the otherwise loose in recent years monetary policy of the European central bank (whether it is necessary is a matter of another discussion). Far much more attention however is dedicated to the indicator “current account deficit”. Whether to simplify or due to unwillingness to further deepen in theoretic analysis, it is considered to be a universal measure of the state and perspectives before a given economy.
There are two situations, in which the high current account deficit could really be an indicator of a forthcoming crisis. The first is when it is financed via emission of public debt. Because no country can borrow infinitely, at a certain point the debt could not increase further, the government falls into insolvency, and paying back old debt leads to raising tax burden on business and citizens. The second situation envisages artificial maintenance of high exchange rate of the domestic currency, impeding export and stimulating import. This would inevitably result in reserves’ outflow and at a certain point in time – to “attack” against the currency and change in the exchange rate.
Bulgaria is not in any of the above-described situations. The government is not accumulating debt, but what is more – it pays out old debt. The debt burden below 20% of GDP is among the lowest in the world. In the same time the BNB monetary policy is restricted in the currency board regime, which has full (even considerably exceeding 100%) coverage of the domestic currency with reserves in euro.
The statistics, if viewed in its integrity, confirms the stated so far. The current account deficit is increasing by 75% in 9 months (relative to the same period of 2006), but the financial account surplus is growing at 98%. Even foreign investments alone are higher than the current account deficit. The total balance of payments is positive, which means that the currency inflow in the country is exceeding outflows. In fact this is a never-changing in recent few years, as we even find certain proportionality in the pace of growth.
Many analysts point as risk the large share of direct investment in real estate. In 2007 it is about 38%, as compared to 35% in 2006. The suggested risk lies in the fact that this inflow may cease and then investments as a whole will decline. On one hand, even if this happens this would mean a partial contraction of businesses, serving real estate – construction, maintenance, transportation – without however to reasonably expect a systematic (or total) problem with other sectors. On the other hand, the sole fact that a particular location is attractive for investments does not necessarily mean that it will cease to be such in the near future. In other words, if Bulgaria improves its quality of life, infrastructure and communal services, it would stay a likeable place for living, vacation and investment in the future, as well.
Finally we must also point at the fact that external investments in processing industry in fact cease in 2007. To some this might be an indicator of loss in competitiveness. But the happening might be interpreted also as a reallocation of business toward sectors with higher value added, i.e. opportunities for new enterprises in labor intensive sectors, based on cheap low-qualified labor. And this is moreover positive news – it is not surprising that export but do not attract investment in the processing industry.
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