Danubian neighbors advised to be prudent for currencies’ sake

BUCHAREST/SOFIA (Reuters) – EU hopefuls Romania and Bulgaria should stick to fiscal prudence and lure more foreign investment to prevent an east European scenario of bulging external deficits pressuring currencies, analysts said. Current account deficits in the two ex-communist Balkan neighbors, which enjoy strong economic growth, are seen ballooning to 6.7 percent in Romania and to 7.75 percent in Bulgaria this year, mainly due to booming imports. Investors worry about widening external deficits, especially when they are driven by imports of consumer goods, because it means the financing of these gaps could trigger a steep depreciation of a country’s currency. «Deficits of that size can create problems if there is a shift in investors’ confidence in the countries, which would make financing less stable,» Edward Parker, analyst for Bulgaria and Romania at Fitch ratings, told Reuters. But analysts said the two countries were far from currency crises like that in more advanced European Union future members such as Hungary in recent weeks or the Czech Republic in 1997, when the crown fell sharply due to a high current account gap coupled with a lax fiscal policy. «In Romania, the budget deficit has overperformed so far,» Berna Bayazidoglu of Credit Suisse First Boston said. Romania’s budget deficit was 0.7 percent of GDP in the first 10 months of this year against a 2.7 percent target for the whole year, while Bulgaria is running a surplus. «In Bulgaria, because the budget is roughly balanced, that indicates that the current account is driven by the private sector,» Parker said. «And that’s more reassuring than if it was driven by public spending.» Analysts said the two countries should improve their business climate, press on with privatizations and curb government spending to continue to attract foreign direct investment (FDI) to finance their deficits. «As long as they duly maintain economic policy, that should underpin investors confidence and make their current account deficits financeable,» Parker said. In Bulgaria, FDI is estimated at $1.4 billion this year, having reached $1.2 billion over January-October. In Romania, FDI reached $987 million in the first 10 months of the year, from $882 million in the same 2002 period, and is seen on the rise in the following year. «For Romania, 2005 might be the moment of truth,» ABN Amro senior analyst Radu Craciun said. «Big privatizations, such as that of (national oil company) Petrom, which will bring important foreign investments, are programmed for 2004.» The sale of Petrom, scheduled to be completed by end-March 2004, is estimated at around $1.0 billion and seven international companies are competing for the company. The International Monetary Fund has advised Romania to reform its loss-making power sector, where companies should hike prices to cover costs. Analysts say the two countries should maintain their tight fiscal policies despite the fact that Romania’s ex-communist government faces elections next year and the popularity of Bulgaria’s pro-Western ruling coalition has been plunging. «If for some reason there is a political uncertainty and if FDI stops, then we would start getting concerned but we don’t see that happening for the time being,» Yarkin Cebeci, JP Morgan analyst on Bulgaria, said.