SOFIA (Reuters) – Bulgaria’s current account deficit hit a record 16 percent of GDP in 2006, exceeding the gloomiest of expectations and causing concern among analysts about the European Union newcomer’s financial vulnerability.

The 2006 external imbalance was –3.9 billion euros, or 16 percent of gross domestic product, preliminary data from the central bank showed last month. That was well above the 2005 deficit of –2.4 billion or 11.3 percent of GDP.

The Socialist-led government, which runs one of the tightest fiscal policies in Europe to avoid the gap spiraling out of control, had expected it to expand to 15 percent of GDP.

Analysts said the lack of improvement in the bloated deficit would probably send a warning signal to investors, although it was fully matched by hard currency inflows from foreign direct investment.

“It is dangerous. It is as bad as it gets,” said Agata Urbanska, market analyst with ING bank. “It worries me because it means the trend is continuing and we were all looking for a turnaround.”

The ex-communist state’s vast external shortfall stems primarily from rampant consumption as Bulgarians are for the first time able to buy foreign-made goods.

The Balkan country’s trade deficit also hit a record 21.8 percent of GDP versus 20.2 percent a year earlier, due to an explosion in consumption.

Foreign direct investment in Bulgaria posted a record of –4 billion, covering 104 percent of the current account shortfall. The figure was higher than in 2005 when FDI reached –2.3 billion, or 95.8 percent of the current account gap.

But most of the cash went to real estate and construction, which analysts said was a short-term investment that could be quickly abandoned and did little to boost the sustainable manufacturing capacity needed to expand exports.

“What you want to look for is a boom in exports and manufacturing investment,” Urbanska said. “The fact that the gap is covered is a reason why Bulgaria does not have a financial crisis today. But the vulnerability is there.”

Analysts said one of the few positive signs in the current account data was that exports grew faster. They rose 26.6 percent to –12 billion euros on an annual basis last year, while imports increased 25 percent to –17.3 billion.