Rising current account deficits in Bulgaria, Croatia and Romania reflect booming domestic demand, not a crisis of competitiveness, Fitch said Monday in a new report, "Bulgaria, Croatia, Romania: How Sustainable are External Imbalances?", quoted by BTA.

The three countries are running big current account deficits: 8.1 per cent of GDP for Croatia, 10.3 per cent for Romania and 16.3 per cent for Bulgaria in 2006. But export growth has been strong, averaging 12 per cent a year from 2000 to 2006 in Croatia and 21 per cent a year in Bulgaria and Romania.

Trade deficits have grown because imports have risen even more quickly to meet soaring domestic demand. Fiscal loosening in Croatia and Romania is adding to demand pressures in those economies, while Bulgaria ran a prudent fiscal surplus of 3.3 per cent of GDP in 2006.

Rising current account deficits need to be financed with ever greater inflows of foreign capital, the rating agency said. Positively for the health of the external finances, all three countries are financing most of their current account deficits from foreign direct investment.

But gross external debt is still growing relative to GDP despite the strength of foreign direct investment inflows, mainly driven by external borrowing by the banking systems, fuelling rapid bank credit growth. Fitch noted that all three countries' banking sectors are largely foreign-owned, mitigating the risks from the run-up in banks' external borrowing.

Bulgaria and Romania compare favourably with other countries rated "BBB" on external liquidity measures, while Croatia again fares less well on this assessment, rating agency Fitch said.