Bulgarian Finance Minister Plamen Oresharski commented that the Fitch downgrade reflects the reality. He said though that he does not expect the Fitch analysis will influence the outlooks of the other credit rating agencies.
"I am aware the analysis of Fitch is not unique, this is also done here, by domestic and other foreign observers, and this corresponds to the truth," Oresharski added. According to him, the analysis is negative from the point of view of global risk and reflection on the country.
"This should make us even more careful in respect to macroeconomic policy," the Finance Minister commented. In his words, this country should be even more careful in respect to expenses and in respect to the ambitious goal for revenue to exceed costs this year.
Taking a question whether the 3 per cent surplus is sufficient to minimize these risks, Oresharski said that at this stage it is, "but we do not know how the external and domestic picture will change by fall in relation to inflow of foreign investments, of current account deficit for this year and inflation trends".
"It is dynamic and we don't know what outcome the forecasts of recession, given for both the American and the European economies, will have." In his words, all this is related and Bulgaria, for better or worse, is becoming an increasingly integrated element of the global economic environment and consequently bears both the postive and the negative outcomes.
In its announcement of the credit rating change, Fitch Ratings quote Edward Parker, Head of its Emerging Europe sovereigns as saying that "current account deficits in the Baltic States,
Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards." "External deficits that were easy to fund in times of abundant liquidity and risk appetite may be harder to finance following the global credit shock. The Negative Outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment."
Fitch estimates 2007 current account deficits (CADs) at 25 per cent of GDP in Latvia, 19.5 per cent in Bulgaria, 16 per cent in Estonia, 14 per cent in Romania and 13.7 pre cent Lithuania. Along with Georgia, Fitch estimates these to be the highest CADs out of all of the 105 Fitch-rated sovereigns.
Substantial CADs, external financing requirements and rapid credit growth have been long-standing rating weaknesses that Fitch has highlighted, the Fitch press release says. However, concerns have heightened over the past 12 months as macroeconomic imbalances have widened and, in some case, remain on a deteriorating trend. Against this backdrop, the global
credit crunch represents a significant negative shock. In addition, inflation has risen sharply, weaker euro area GDP growth will adversely affect exports, while delays to euro adoption timetables exacerbate external financial risks. Fitch believes the outlook for the region has, therefore, weakened and rating dynamics have shifted.
There are valid grounds for believing that fast-growing transition countries can sustain high CADs, but history suggests it can be dangerous to think "it's different this time". CADs
mainly reflect buoyant private sector capital inflows, including significant foreign direct investment, rather than budget deficits, though fiscal policy loosening in Romania is a
concern. Most countries are still gaining export market share, but tightening labour markets are starting to affect competitiveness. However, rapid bank credit growth and external
borrowing, often from foreign parent banks, has played a key role in both fuelling and financing CADs. High rates of foreign bank ownership have been a net positive for the region, but could open a channel of contagion, should the global credit squeeze persist, Fitch says.
This rating agency believes that the global credit shock could help to engineer a welcome moderation in credit growth and a gradual unwinding of external imbalances. However, economic adjustment may not be smooth, particularly after such a strong financial boom. Fitch believes that a broadly soft landing remains the most likely scenario in each of the four countries. But the downside risk of a hard landing has increased. A hard landing - particularly if it involved the abandonment of a currency peg - would entail significant economic costs and likely lead to rating downgrades. In that event, high levels of eurosation would be a vulnerability, but strong public finances, flexible economies and foreign bank ownership could
ease the costs of adjustment. Conversely, sufficient evidence of macroeconomic rebalancing and soft landings could see a reversion to Stable Outlooks. Fitch expects that the resolution of Outlooks will be largely driven by country specific developments.
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook
changed to Negative from Stable
Long-term local currency IDR: affirmed at 'BBB+'; Outlook
changed to Negative from Stable
Short-term foreign currency IDR: affirmed at 'F3'
Country Ceiling: affirmed at 'A-' (A minus)