Moody's Says Bulgaria Is More Vulnerable to `External Shocks'

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Moody's Says Bulgaria Is More Vulnerable to `External Shocks'

Bulgaria's record current-account deficit and high lending growth have increased its `vulnerability to destabilizing external shocks'' in the past year, Moody's Investors Service said.

The vulnerability has increased to ``medium,'' from ``low'' in February 2007 as the Balkan nation's current-account deficit is expected to exceed 20 percent of gross domestic product, becoming one of the widest in the world, Bloomberg reports. Moreover, credit growth reached 60 percent last year, the ratings service says in a report today.

The report comes five days after Fitch Ratings lowered its credit rating outlook to negative from stable for Bulgaria, Estonia, Latvia and Romania. Moody's hasn't yet changed its positive outlook for Bulgaria since February 2007. Moody's has rated Bulgaria Baa3, the company's lowest investment grade rating, since March 1, 2006, putting it level with Croatia and Armenia.

Bulgaria's ample foreign-exchange reserves, estimated at $16.5 billion, a budget surplus of 3.9 percent of GDP and foreign investment at 17.9 percent of GDP have helped compensate for the growing external imbalances in the past year, Moody's said. Bulgaria's low public-debt-to-GDP ratio of 19 percent helps tighten fiscal policy, Moody's said.

``The global liquidity crisis that began in July 2007 could also have an indirect effect on Bulgaria in 2008,'' the report said, international banks with subsidiaries in Bulgaria ``may reduce lending for liquidity reasons or due to increased risk aversion.'' Bulgaria's banks, assessed by Moody's as ``relatively robust'' are 80 percent foreign owned and 100 percent private.

Moody's also warned that Bulgaria's economic growth will probably slow this year, after forecasting 6 percent growth for 2007, as global liquidity crunch erodes foreign investment in the Balkan nation. Bulgaria's $31.5 billion economy slowed to 4.5 percent in the third quarter after 6.6 percent in previous three months of 2007.

Bulgaria's currency board system based on a lev/euro peg ``further heightens concerns as it constrains policy flexibility in times of stress.'' The currency board limits the central bank's ability to control inflation.

Bulgaria's inflation rate was the second highest in the European Union in 2007 at 12.5 percent.

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