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Tuesday, December 26, 2006 

Foreign direct investment in Bulgaria 53% of annual inflow

Net foreign direct investment inflows surged 53 per cent year-on-year to 3.2 billion euro in January-October while the annualised current account (CA) gap expanded to 14.7 per cent of GDP as of October 2006.

The net inflow of FDI more than offset the negative trade balance, rising 53 per cent to 3.2 billion euro over January-October, or 19 per cent above the CA deficit for the same period, according to Bulgarian National Bank preliminary data. About 53 per cent of all FDI inflow in January-October was reported as equity participation, seven per cent as reinvested profits and the remaining 40 per cent was assigned to other forms of capital transfers, including internal financing from foreign parent companies to local subsidiaries.

FDI breakdown by industry shows that nearly 50 per cent of this year’s non-debt inflows were directed to purchases of real estate or construction projects.

The consumer price index (CPI) grew by 6.1 per cent y/y in November, accelerating from 5.7 per cent y/y in October and 5.6 per cent y/y in September, according to National Statistical Institute (NSI) data. The CPI, however, remained below the period average of 7.3 per cent y/y in January-October and was still much lower overall than 2006’s inflation peak of 8.8 per cent y/y in February.

The speed-up in November was caused by the groups of food and non-food products and restaurant prices, while the group of services has a disinflation effect. On an annual basis, about 50 per cent of the inflation has been generated by excise tax hikes for tobacco and alcohol products that came into effect in the beginning of 2006.

The price index of just 2.6 per cent y/y in the service group for November was quite encouraging for the potential of Bulgaria to meet the price criterion for adoption of the euro, which is based on the harmonised index of European Union and has a much bigger exposure to services than the local consumption weights. Inflation, however, continues to pose risks on the ambition of the central bank and the Government to adopt the euro by 2010, while all other criteria look easily achievable.

The CA deficit widened by 50 per cent y/y in October to 525 million and 69 per cent y/y to 2.67 billion euro in January-October, according to NSI preliminary data. The 12-month CA gap for the period ending in October increased to 14.7 per cent of GDP estimates for the same period, relative to 14.3 per cent a month earlier. Worse performance was recorded in all major groups of the CA balance, as the merchandise trade deficit continued to increase while the positive net inflows for service, income and current transfers narrowed.

Nevertheless, the overall balance of payments remained on a big surplus in the period January-October due to strong inflows of FDIs, which significantly exceeded the CA deficit. Debt-related inflows as well as unidentified transfers booked in errors and omissions also contributed to the large surplus in the balance of payments in January-October and October alone.

Source: Sofia Echo

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