I forgot to say, great to see you back!

On Bulgaria: the numbers that you are reporting are in line with what I remember reading in the last few weeks. Each piece of the mosaic is pretty dull and dark. Nevertheless, somehow the powers that are manage to assemble these stones into a fairly cheerful picture of a mild recession with GDP falling only 1, 2 or 3 percent. I have only a few direct contacts in BG, but most refuse to believe that the bad old times are back. Or they know it in their heart, but have not changed behavior yet. Well, lets hope they are right and we are wrong!

I hope you are well.

“You promised some months ago to write an article about the economics in Moldova.”

Yes, I did. Thanks for reminding me.

“Well I assume you are a busy man”

You said it. Although now the crisis has temporarily gone into “sleep” mode I do have a bit more time. There are just so many things to catch up on.

“I am very interested in the east-west European border area, not the political one, but the cultural one”

Yep, and I had been generally following the recent “events”.

“Well, Moldova is in an economic sense rather kind of weird, but isn’t this fact just making it interesting to make an article about this European country?”

Definitely, I think the whole situation is intriguing.

“Also, it is difficult to talk about “the Moldovan economy”, for there are two economies involved. And the one in the unrecognized area is the most important one…”

Well actually I would say three economies, since you also have to think about all those Moldovans who work outside either of the two countries (regions, whatever), and I would say, in fact, that this third part is the part that interests me most.

Basically, Moldova has the highest level of remittances to GDP on the planet. It also has one of the lowest levels of fertility. So the question I want to examine is how a country facing such a rapid population decline can hope to live from exporting its one scarce resource – people (or labour if you prefer). I am also interested in the policy responses that have emerged to this situation.

Last year I did a comparative study of Vietnam and Thailand which is quite relevant and you might be interested in (you can find it here). Vietnam is also basically a low fertility labour exporter, and in the long run pretty unstable I think.

Also remittances are far less positive than most imagine in a macro economic sense, since they are very distortionary, and lead to asset speculation (housing). The Moldovan central bank also had to accept a capital loss on all the reserves it had accumulated (in an attempt to “cool” growth) last year, a fat Brad Setser had rather feared for China.

So lots and lots of very interesting issues. I think small countries are often fascinating (viz the Baltics) for what they can teach us about how larger ones may function. And yes, I will put Moldova on my “to do” list. Being realistic this means June – and assuming that the whole crisis thing doesn’t suddenly break out again in the meantime .

“Bulgaria is a bit of a mystery.”

Well, yes it is really. The real economy data are not good – industrial output was down 17 percent (year on year) in both February and March, and retail sales were down an annual 8.4 percent in February – but this doesn’t seem to have gotten through to sentiment yet.

Fitch cut Bulgaria’s outlook on their local and foreign currency debt rating to negative recently citing the rising cost of financing the current account gap. Bulgaria’s current account deficit hit 25 percent of gross domestic product in 2008, and this was the highest of any of the 80 emerging market countries rated by Fitch.

Fitch’s long-term foreign currency issuer default rating is currently BBB- and the long-term local currency BBB, but with the rating outlooks revised to negative from stable downgrades to what would effectively be “junk” status seem quite likely, and fairly imminent.

The IMF forecast that Bulgaria’s economy will contract by 3.5 percent in 2009 and that the current-account deficit will narrow to 12 percent of GDP. The gap is narrowing fast, and was down by 66 percent to 225 million euros in February from a year earlier.

This correction will be pretty painful for them, since with the Lev pegged to the euro they can’t devalue and jump start exports, so almost all of the work in closing the gap will come from a reduction in imports, which will be hard on living standards (January- February imports fell 32 percent, while exports fell 27 percent year on year).

They are also having problems with the fiscal situation. Bulgaria previously ran budget surpluses of around 3 percent (for five successive years) in an attempt to weaken the trade and current-account gaps.

However all this is now changing rapidly. In November, a spending target for 2009 was set at 29.4 billion lev, with a budget surplus objective of 3 percent of gross domestic product. But revenue has been declining and expenditure rising as the economy slows, so in December the government decided to cut spending by 10 percent and aim for a modified surplus of 2 percent of GDP.

But even this now seems way too optimistic, and the budget surplus narrowed in February to 300.2 million lev, from 631 million lev in January as annual revenue growth slowed to 10 percent following a 25 percent increase in January (ie the drop is rapid, and remember inflation was still running at 6 percent in February, so the real increase was more like 4 percent).

The IMF estimates Bulgaria now risks a fiscal deficit of at least 1 percent of GDP unless it cuts expenditure by a further 10 percent,and the government has responded by reducing its sights to budget surplus of 1 percent of GDP this year, according to a Finance Ministry statement on April 26.

On the other hand we are talking about the pressures of short term crisis management dynamics here, since the real problem is external debt and not public debt per se, since this only amounted to 12.6 percent of GDP as of March, one of the lowest levels in the EU and well within euro- adoption criterion which allows up to a 60 percent public-debt-to-GDP ratio.

Bulgaria’s finance ministry has denied they are holding talks with the IMF, and has rejected claims by the opposition that they approached the fund to seek a loan but were refused since they were not willing to consider the kind of programme being implemented in Hungary or Latvia. Again, this kind of thing would probably be politically impossible with elections looming on July 1st, so maybe we will see a “sea change” in August (as happened in Romania after the elections).

Yep, these bill-boards were used during those elections which ended in riots and the burning of the presidential palace and the houses of parliament. Although the EU is claiming that they are against protective measures, strangely Brussels recently introduced for the imports of the Moldavian metallurgical plant an customs duty in size of 3,8%.
Well, Moldova is in an economic sense rather kind of weird, but isn’t this fact just making it interesting to make an article about this European country?
Ron.