Moody's said Friday it has affirmed the Baa3 local and foreign currency ratings of the Bulgarian government. The local and foreign currency bond ceilings are affirmed at Aa3 and A1, respectively. At the same time, Moody's also affirmed Bulgaria's foreign currency deposit ceiling at Baa3, short-term foreign currency bond ceiling at P-1 and short-term foreign currency deposit ceiling at P-3. The outlook on all the ratings and ceilings remains stable.

In Sofia, Bulgarian Finance Minister Plamen Oresharski commented that the confirmed rating is satisfactory on the backdrop of the worsening world picture.

The Moody's statement quotes Kenneth Orchard, Vice President-Senior Analyst in Moody's Sovereign Risk Group, as saying that Bulgaria "is likely to experience a difficult recession in 2009 as the economy suffers from shrinking exports and slowing inflows of foreign capital". "Nevertheless, many years of prudent fiscal policy and low debt mean that the government is well positioned to cope with the situation."

Moody's recognises that the Bulgarian government used the recent period of robust economic growth to strengthen its financial position. Indeed, budget surpluses averaged 2.7 per cent of GDP between 2004 and 2008, debt/GDP declined to 14 per cent, and a significant fiscal reserve was accumulated.

Moody's also notes that many years of strong domestic demand growth have left the Bulgarian economy with heightened vulnerabilities. Domestic credit, external debt and the current account deficit all increased at rapid rates from 2005 to 2008. The banking sector presently appears to be in reasonably good shape, with relatively high capital adequacy and liquidity ratios by international standards, but these buffers could be quickly eroded if the downturn intensifies.

Moody's expects that foreign direct investment and banking sector capital inflows will decline significantly in 2009 due to the economic and financial crisis in Western Europe. "The decline in foreign financing will probably cause a sharp downward adjustment in the current account deficit, implying declining output and weak government revenue growth," cautions Mr. Orchard. "However, Moody's believes that low wages and a flexible labour market will ease the adjustment and ultimately allow Bulgaria to rebound when the regional economy improves."

Moody's notes that public sector financing presents limited immediate risks. Government debt service in 2009-10 is low and the fiscal reserve provides a backstop if the government is unable to maintain its commitment to a budget surplus this year.

"Moody's believes that a greater risk comes from the large amount of private sector external debt that must be re-financed in 2009," emphasises Mr. Orchard.

Moody's rating factors in the prospect of extraordinary financial support from the IMF, EU and related European institutions if the balance of payments were to significantly deteriorate. "Although it is not Moody's central scenario, the Baa3 rating assumes that official financing will be made available to Bulgaria to alleviate pressure on the balance of payments if the situation requires," adds Mr. Orchard.

Low debt ratios mean that the government can afford to borrow to support the private sector and the currency board without threatening the government's creditworthiness. Debt/GDP could rise significantly and still remain well below the EU average.

Source: BTA