Bulgaria Outlook Revised To Stable From Negative

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Bulgaria Outlook Revised To Stable From Negative

On December 1, 2009, Standard & Poor's Ratings Services revised its outlook on the Republic of Bulgaria to stable from negative, the representatives of one of the largest rating agencies told BTA. The 'BBB' long-term and 'A-3' short-term sovereign credit ratings were affirmed.

The ratings on Bulgaria reflect the agency's view of the government's strong track record of prudent fiscal policy and low gross debt; solid growth prospects over the medium term; and the country's EU membership. Offsetting these strengths somewhat are large external imbalances and the related risks as a result of the adverse economic environment, which Standard & Poor's expect to continue in 2010.

In their view, Bulgaria continues to face economic risks due to the uncertain outlook for external demand and the sharp tightening of the external commercial credit channel, which negatively affects domestic demand. As a result, the current account deficit, which peaked in 2008 at 25.4 per cent of GDP amid an overheating economy, has contracted sharply and is expected at around 10 per cent in 2009 (the deficit is expected to be fully funded by foreign direct investment flows). GDP is expected to contract by around 6 per cent in 2009 and a further 2 per cent in 2010, followed by a positive growth rate in 2011.

The large adjustment of the country's external balances and real economy--via expected declines in both real and nominal wages--has presented the Bulgarian government with significant budgetary challenges due to large declines in tax revenues, in particular value-added tax. In the first half of 2009, the budget surplus rapidly shifted into deficit, a situation exacerbated by the July 2009 general elections and an associated increase in discretionary spending.

However, the new government promptly reversed the situation by means of corrective budgetary measures. In 2009, therefore, the agency expects a deficit of up to 1 per cent of GDP, the lowest in the EU. A similarly low deficit is expected in 2010, on the back the government's plan to implement significant budgetary adjustment. It believes these measures demonstrate the authorities' commitment to fiscal discipline as a support to the country's currency board arrangement. In their view, ongoing fiscal prudence, low government debt, and the preservation of the fiscal reserve (which has fallen from 2008 to above 12 per cent of GDP in 2009) provide adequate buffers against fiscal pressures emanating from the ongoing economic adjustment.

Given the severe recession, the agency believes the soundness of the financial sector will continue to be under pressure. The banking system appears to be well capitalized (capital adequacy ratio of above 17 per cent of GDP in October 2009), which provides support as the credit portfolio continues to worsen, with an increasing share of nonperforming loans in total loans. Moreover, the agency takes comfort in the fact that Western banks, which have almost 85 per cent market share in Bulgaria (with Greek banks dominant at around one-quarter of total market share), have expressed their resolve to support their Bulgarian subsidiaries.

Outlook

"The stable outlook reflects our view of the government's commitment to fiscal discipline. We believe this is likely to be demonstrated by the full implementation of the budgetary plan and supplementary deficit-reducing measures, should the current downturn lead to stronger budgetary pressure than what is currently foreseen," Standard & Poor's credit analyst Marko Mrsnik said. "The outlook also hinges on our expectation that the government will implement structural reforms in the social security system, particularly in health care, despite the aderse economic environment."

The agency believes that the authorities will successfully sustain the currency board arrangement, and that foreign parent banks will continue to finance their local subsidiaries.

A lasting improvement in external financing conditions would support the ratings at the current level. If fiscal performance deviates from the government's targeted trajectory (anchored by balanced budgets), or if external financial liquidity worsens, the ratings on Bulgaria could come under downward pressure.

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