Feb. 16, 2011 -
PRLog -- Fiscal Risks Emerging T he Bulgarian economic recovery is gathering momentum, with the latest data provided by the National Statistical Institute showing a second consecutive month of slowing decline. While the improvement in headline growth figures has provided a positive signal to the market, this has been driven largely by a surge in exports which has masked the weakness of domestic demand. Going forward, we believe that the resurgence in exports will peter out, dampening the broader headline growth figure. In addition, we have become more concerned about the widening fiscal deficit. Although the government has cut back on spending, the general government shortfall is still expected to near 5% of GDP this year. As such, while the government consumption component of the national accounts will remain weighed down in the coming quarters, counteracting improvements elsewhere in the economy, public finances look shaky. Bulgaria's minority Citizens for European Development of Bulgaria government has suffered a deterioration in voter support since coming to power in July 2009, though remains the most popular political party. We believe that the period of grace is over, with expected strike action, scope for increasingly populist rhetoric in parliament and a yawning fiscal deficit potentially driving a more pronounced decline in popularity. A major theme of ours back in 2009 was the need for Bulgaria's heavily indebted private sector to begin a painful process of deleveraging. However, this has failed to transpire. Ultra loose monetary policy imported from the eurozone through Bulgaria's currency board, coupled with a stoic banking system, have enabled debtors to delay repayment. However, we believe that the current fiscal trajectory poses a risk to this relatively sanguine situation, with a failure to contain the deficit threatening to undermine confidence in the currency board, which so far has been the key factor sustaining private sector debt at the current level. A sset growth has stabilised markedly in the last 12 months for Bulgaria's banking sector, auguring well for our long-held view that the industry will expand at a much more subdued rate. We expect growth to align with the broader economy, which will be beneficial for economic stability over the longer term.
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