Bulgaria faces little risk that it will have to devalue the lev because ample foreign exchange reserves and investment help compensate a growing private-sector foreign debt and current-account deficit, Nordea Bank AB said.
Nordea, the biggest Nordic lender by market value, said in a report today that speculation of a devaluation of Latvia's currency, the lats, may trigger similar concerns about Bulgaria, which, like Latvia, has a currency board system that involves a fixed exchange rate. Bulgaria joined the European Union on January 1 and will seek to enter in the spring the EU's exchange-rate mechanism, the required two-year test of currency stability, Prime Minister Sergei Stanishev said in an interview on February 8.
„Even though inflation and the current-account deficit are obvious challenges, we see a devaluation of the lev as unlikely,” Nordea said. Bulgaria's EU membership and low labor costs will continue to attract foreign investment which will spur growth of more than 6%, it said. „The growth outlook is favorable.” Bulgaria's currency is pegged at the rate of 1.955 lev per euro since July 1997, when it imposed the currency board system to recover from a financial crisis that closed one-third of the country's banks and fueled inflation to 2,020%. The system bans central bank lending and requires the lev in circulation be matched by the foreign exchange reserves.
The Balkan country of 7.8 million people had the highest annual inflation in the EU in January, at 7.2%. Bulgaria's private-sector foreign debt is €15 billion ($20 billion), compared to €9 billion of foreign exchange reserves, which produces a debt-to-reserves ratio of 1.6, Nordea said. This compares with 4.9 for Latvia. Bulgaria's current-account deficit expanded last year to an eight-year record €3.87 billion, or 16% of GDP. Record levels of foreign direct investment of €4 billion fully cover the deficit. In Latvia, foreign direct investment together with portfolio investment cover 37% of the current-account gap, Nordea said. Foreign investment will continue to drive Bulgaria's $24 billion economy, which grew 6.7% in the Q3 of 2006, twice the EU average. „We compared the data of other countries in Europe with currency boards to see whether there is risk of the Latvian crisis spreading,” Elisabeth Andrew, the chief analyst at Nordea in Copenhagen, said in a phone interview today. „We don't see a risk of the crisis spreading.” (Bloomberg)