Fitch: Bulgaria, Romania and Croatia still competitive
LONDON – Rising current account deficits in Bulgaria (BBB), Croatia (BBB minus) and Romania (BBB) reflect booming domestic demand, not a crisis of competitiveness, international firm Fitch said yesterday in a new report, «Bulgaria, Croatia, Romania: How Sustainable Are External Imbalances?» «Despite disconcertingly high current account deficits, Bulgaria, Croatia and Romania are seeing strong export growth and rising export market shares, suggesting their real economies remain competitive,» said Andrew Colquhoun, the director at Fitch’s Sovereigns Group. The three countries are running big current account deficits (CADs): 8.1 percent of GDP for Croatia, 10.3 percent for Romania and 16.3 percent for Bulgaria in 2006. But export growth has been strong, averaging 12 percent a year from 2000 to 2006 in Croatia and 21 percent a year in Bulgaria and Romania. Trade deficits have grown because imports have risen even more quickly to meet soaring domestic demand. Fiscal loosening in Croatia and Romania is adding to demand pressures in those economies, while Bulgaria ran a prudent fiscal surplus of 3.3 percent of GDP in 2006. Rising CADs need to be financed with ever greater inflows of foreign capital. Positively for the health of the external finances, all three countries are financing most of their CADs with foreign direct investment (FDI). FDI inflows into Bulgaria totaled 128 percent of the cumulative CAD over 2000-2006 (against 75 percent for Romania and 78 percent for Croatia). But gross external debt is still growing relative to GDP despite the strength of FDI inflows, mainly driven by external borrowing by the banking systems, fueling rapid bank credit growth. Fitch notes that all three countries’ banking sectors are largely foreign-owned, mitigating the risks from the runup in banks’ external borrowing. External solvency is not a near-term threat in any of the three. Croatia is in the weakest position to withstand any future shocks, with the highest gross external debt and the widest net liability in its international investment position, relative to GDP. Bulgaria and Romania compare favorably with rated peers on external liquidity measures, while Croatia again fares less well on this assessment. «Ultimately, external imbalances on this scale are unsustainable and will need to be corrected at some stage,» said Colquhoun.
