 BACK ON THE FINANCIAL MARKETS |
Propped by a rigid currency board system introduced in July, 1997, Bulgaria has managed to achieve a very high level of financial stability as a result of strict fiscal policies and - some experts claim - excessive controls over commercial lending. Inflation was tamed almost overnight, falling from a hyper-level of 573% in 1997 (most of it accumulated during the first four months of the year) to a single-digit annual inflation since then. Foreign currency deposits rose within 6 months from the rock bottom USD 300 million to about USD 3.3 billion at the end of 2001.
The currency board arrangement, supported by the International Monetary Fund (IMF), was seen as the only possible way out of a banking system in disarray after 16 commercial banks were closed in 1996/1997 as a result of irreversible insolvency due to an excessive amount of default credits.
Following the collapse of the emerging markets in 1997-98, Bulgaria re-established itself again on the international financial markets with a successful Eurobond issue. The 2001 EUR 250 million issue has an interest coupon of 7.25% on an annual basis. The bonds were priced at 98.855 of their face value, which equals an actual yield for the buyer of 7.5% until maturity.
Bulgaria's Finance Minister Milen Veltchev commented that much of the success was due to the decision made by Standard & Poors ' rating agency barely a week before the scheduled release of the eurobond issue, to upgrade Bulgaria's credit rating from B to BB. A couple of days after that, theEuropean Central Bank reduced its interest rates, which served as an additional boost for Bulgaria's euro-bonds.
The new credit rating increased the demand for the Bulgarian eurobonds, with subscriptions reaching nearly EUR 1.1 billion at a 3.5% risk premium rate. The whole issue was sold out in 10 minutes after being floated. The 2002 National Budget provides for issuing bonds of up to EUR 700 million worth. Thus, Bulgaria set the necessary conditions to issue an additional volume of eurobonds with the same maturity and coupon and principal payment dates. The only difference with the current parameters will be the interest, which is determined by the market situation at the time the bonds are floated.
"A state that is servicing without problems
close to USD 10 billion in external debt could float
USD 2 billion dollars in bonds, and they would be
bought as quickly … But we actually do not
need that much money", the Governor of the
Bulgarian National Bank , Svetoslav Gavriiski, said
in a recent interview for a local daily. |
In 2001, the ratio between Bulgaria's domestic and foreign debt to its GDP stood at respectively 73.5% and 77.9%, down from 96% and 107% in 1996.
Shortly after the euro-bond issue, in December 2001 Moody's credit rating agency followed suit by raising its estimate on Bulgaria's government bonds denominated in foreign currencies from B2 to B1.
Another established credit rating agency, Fitch-IBCA, decided in the first days of 2002 to upgrade its long-term credit rating for Bulgarian foreign-currency denominated debt instruments from B+ to BB-.
Despite the slow-down in the world economy in general, Fitch IBCA expects a 4% real GDP growth of Bulgaria's economy for 2002, at an estimate of 4.4% growth in 2001. The rating agency specifically stressed on its positive assessment of the progress Bulgaria has achieved in its accession talks with the European Union, of the strict compliance with the effective currency board arrangement and the commitments assumed by the incumbent government on irreversible structural reforms.
It is indicative that the top foreign investors in Bulgaria - Germany, Greece, Belgium, Italy, Great Britain and the USA - acquired some 90% of the Eurobond issue.
The dramatic developments in Argentina, which had a similar currency board arrangement, highlighted some major differences. Unlike Argentina, Bulgaria (like Lithuania and Estonia) has a natural way out of the currency board by the adoption of the euro after the country is admitted to the European economic and currency union. Until that time, Bulgaria is obliged to stick to its current arrangement as that is seen as the major barrier to developments, which brought the 1996-1997-hyperinflation situation. Besides, Bulgaria's economy is open to external influences, with a ratio of exports to GDP of close to 60%.
Fortunately, the Argentine crisis - which could be best described, in terms of its international implications, as confidence crisis - occurred at a time when Bulgaria's foreign debt bonds seem to have pulled out of the common pot with similar emerging-markets debt instruments. For the time being this could be viewed as evidence that the positive effects of the currency board on Bulgaria have brought about a fundamental change in the overall economic and financial situation.
According to Johann Jonach of Raiffeisenbank-Bulgaria, "everything will depend on the further decisions and policy of the government. If the same mistakes are made, this will lead more or less to the same results. But in contrast to Argentina, we are only in the beginning phase of the Currency Board - it was introduced only four years ago - and the gap between the development in Germany and Bulgaria has not been as big as it is between the peso and the US Dollar in Argentina. Also, the foreign debt is much smaller than the one in Argentina. Theoretically, there is a risk and I think this is a good lesson for the decisions to be made here. But I think the risk is quite small."
"Bulgarians have a number of advantages"; Jonach went on to say. "Take for instance the currency board and the stable local currency. There is also the very good educational base in Bulgaria. Traditionally Bulgarians have been more oriented to the West than other countries from the former communist world. Language knowledge is much better than in most other countries in the region. People are very open-minded. These are probably the major assets; and of course the geographic location - the crossroads to Asia and to the Middle East - this should not be forgotten either." |
