C/A Gap Cause for Concern in Bulgaria, Romania; Slovenia Benefits from Euro Adoption - UniCredit

October 4 (SeeNews) - Economic growth remains stable but various trammels such as widening current account (CA) deficit pose a threat in EU newcomers Bulgaria and Romania, while the latest arrival to the eurozone, Slovenia, reaps the benefits of its early monetary integration, Italian banking group UniCredit said .

“As expected, 2007 will be the peak year of the investment cycle in most of central and eastern Europe due to both new construction activity and building of new production capacity,” UniCredit said in its latest CEE Quarterly Report.

The group’s forecast is for strong growth of over 5–6 % in Bulgaria and Romania, EU members since January, for the current year and 2008, with both countries still benefiting from the positive stimulus through accession to the European Union. Despite fairly tight monetary policies, the high investment levels are maintained by infrastructural projects. Consumption is strong, even if it is gradually slowing down, while both countries can profit from some recovery in export performance.

“[Bulgaria’s gross domestic product] GDP grew at a rate of 6.6% in the second quarter of 2007, still in line with our full-year forecast of 6.2% real growth. We expect economic growth of similar proportions next year,” UniCredit said.

“We nonetheless expect a moderate easing of the CA gap, which however remains a cause of concern in both countries and a source of potential vulnerability, particularly given the current international context”, UniCredit said.

In July, the year-to-date current account gap expanded by 74% year-on-year in Bulgaria, reaching 10.5% of projected GDP for the full year and widened by 98% year-on-year in Romania, due to the increasing trade deficit.

UniCredit anticipated some further deterioration in the CA balance to 17.6% of projected GDP in Bulgaria and 12.8% of GDP in Romania at the end of the year, compared to 3.0% in Slovenia.

A very good export performance, matched by lively investments, is driving the economy in Slovenia, for which UniCredit has forecast growth of 5.7% in 2007, and a loss of momentum in 2008 to 5.0%, the report said.

“The benefits of early monetary integration are already reflected in a considerable increase in inflows of foreign direct investment and a substantial expansion of foreign trade flows”, UniCredit said. “However, the full exploitation of the advantages of the single market and the participation in the euro area call for an acceleration of structural reforms.”

Slovenia, a country of two million people, was the first of the 10 states that entered the European Union in May 2004 to join the eurozone in 2007 as the 13th member of the currency union.

Inflationary pressures remain high in Bulgaria and Romania, UniCredit said.

“Inflation risks in Bulgaria increased under pressure from one-off supply shocks in the agricultural and food sectors, lack of competition in some sectors, wage developments and rapid increase in money and credit aggregates”, UniCredit said.

“Following the record lows in inflation recorded in the first half of 2007, inflation rates began rising in August. Nevertheless, despite persistent strong pressure from surplus demand and volatile prices, inflation is expected to drop in the coming months, with the year-end forecast at 4.2%,” the financial institution advanced.

According to UniCredit the credit and liquidity crisis in the U.S. sub-prime mortgage market that has spread to other parts of the world since mid-July has so far only had moderate repercussions for CEE, and “we generally do not expect it to endanger the regional strong growth and rapid financial deepening scenario.”

Key macroeconomic forecasts for Bulgaria, Romania and Slovenia follow, as provided by the UniCredit quarterly report:

BULGARIA

ROMANIA

SLOVENIA