Fitch Ratings Affirms Bulgaria's Long-term Foreign and Local Currency Ratings

Fitch Ratings Affirms Bulgaria's Long-term Foreign and Local Currency Ratings

Fitch Ratings announced Friday that it has affirmed Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and 'BBB+', respectively, both with Negative Outlooks. The agency has also affirmed the Short-term foreign currency IDR at 'F3' and the Country Ceiling at 'A-' (A minus).

The report on the rating action was relayed in Bulgaria by the Finance Ministry.

"The Negative Outlooks signal Fitch's concern that Bulgaria's booming economy, now running a current account deficit of around 22% of GDP, is on an unsustainable path and risks a hard landing, despite rigorously disciplined macroeconomic policies," said Andrew Colquhoun, Director in Fitch's Sovereigns Group quoted in a press release of the organization. "Even if Bulgaria achieves a smoother adjustment, its gross and net external debt levels are starting to look stretched relative to its rating peers, and further deterioration could trigger a downgrade."

A sharp slowdown in the economy would be negative for the ratings. Booming domestic demand is contributing to a rise in imports, taking the current account deficit (CAD) to 21.7 per cent of GDP in 2007. Soaring bank credit, growing 63 per cent in 2007, is fuelling the boom; a sharp correction in credit growth could trigger a wider slowdown. The stock of bank credit is already relatively high among peers at 71 per cent of GDP.

Inflation averaged 14 per cent over the first seven months of 2008, adding to concerns. The composition of Bulgaria's growth looks increasingly frothy, with construction, real estate, and financial services contributing 3.4pp of the 6.3 per cent growth in the economy's gross value-added in 2007. The authorities' options for dealing with these pressures are limited. Fitch believes the budget surplus of 3.5 per cent of GDP in 2007 is near the limits of political sustainability. Monetary policy is constrained by a currency board arrangement (CBA), pegging the currency to the euro.

Bulgaria's external finances are already a rating weakness and further deterioration would add to negative pressure on the ratings. Gross external debt climbed to 105 per cent of GDP in 2007, more than double the 'BBB' median of 45 per cent. However the CBA remains well-supported, with reserves growth of 38 per cent in the year to June 2008. Bulgaria continues to attract high non-debt FDI inflows, totalling USD 5.2 billion in 2007, worth some 13 per cent of GDP, although worsening prospects for the euro-area economy may dent FDI. The liquidity ratio, at a projected 124 per cent for 2008, is below the 'BBB' median of 152 per cent. In mitigation, Fitch notes that the external funding of the Bulgarian banking system, with external debt worth 21per cent of GDP at end-2007, is likely to have come mostly from banks' foreign parents and so should be relatively stable.

Bulgaria's ratings are supported by exceptionally strong public finances. Fitch expects Bulgaria will become a net general government creditor to the tune of 2 per cent of GDP by end-2008 as fiscal surpluses bolster the fiscal reserve account. The authorities prepaid a further EUR 300 million in World Bank debt in March 2008. EU membership supports Bulgaria's fundamental political stability and its long-term economic prospects. The EU's suspension of some unspent pre-accession funding in July 2008 poses no immediate fiscal risk for Bulgaria, although it highlights weaknesses in public institutions and a serious corruption problem. Wholesale withdrawal by the EU of EUR 11 billion of structural and cohesion funding over 2008- 2011 could damage Bulgaria's long-term prospects, but Fitch does not consider this to be likely.

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