JCR Affirms Bulgaria's Credit Rating

JCR Affirms Bulgaria's Credit Rating

Japan Credit Rating Agency (JCR) has affirmed its BBB rating on the foreign currency long-term senior debts and its BBB+ rating on the local currency long-term senior debts of the Republic of Bulgaria, according to a press release posted on its website on Friday.

The outlook of the ratings has been kept negative. The ratings are based on Bulgaria's solid fiscal structure underpinned by a continued fiscal surplus and the substantial reduction of the government debt, its maintenance of the solid currency board arrangement through collaboration between the government and the Bulgarian National Bank (BNB), and its expanding production capacity rendered by robust investments amid massive inflows of foreign direct investment and EU subsidies.

On the other hand, the ratings remain constrained by the country's large current account deficit despite its rapid improvement in the recent months, a sizable foreign debt in the private sector and the fact that its industrial transformation still remains at a primary stage. The outlook of the ratings remains negative, as the external finance of the country's sizable foreign debts in the private sector remains vulnerable to the ongoing global economic and financial turmoil, JCR thinks.

Currently, the Bulgarian financial market has regained its stability due mainly to a spate of liquidity measures adopted by the BNB such as a reduction of the minimum reserve ratio and bank deposit guarantees and moderation of the turmoil. Notwithstanding, the external finance of country's sizable foreign debts in the private sector still has vulnerability. The foreign debts accumulated in the process of the country's rapid economic expansion since 2004 swelled to 108% of GDP at the end of 2008 from 64% at the end of 2004.

JCR believes that the fiscal position is solid enough to meet worse fiscal balance and contingencies. The government has been keeping its fiscal policy tighter since 2004. As a result, the fiscal balance has been in surplus since that year, with the general government debt substantially reduced to 14% of GDP at the end of 2008 from 37.9% in 2004.

A deterioration of the fiscal balance looks inevitable in 2009 and 2010 due mainly to revenue shortfalls stemming from a severe economic downturn. Nonetheless, with its fiscal reserves standing at a level equivalent to more than 12% of GDP at the end of May 2009, the government has sufficient capacity to meet contingencies including systemic risks.

The country's financial system remains stable thanks to the stringent supervision conducted so far by BNB, with its stress test showing that it has enough capitalization to absorb any deterioration in the quality of assets held by banks, the press release says.

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