Fitch Affirms Bulgaria at 'BBB-'; Outlook Stable

Fri Jan 10, 2014 11:35am EST

LONDON, January 10 (Fitch) Fitch Ratings has affirmed Bulgaria's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' and local currency IDR at 'BBB'. The Outlooks are Stable. The issue ratings on Bulgaria's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB+' and the Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following key factors: Strong public finances are the key factor underpinning for Bulgaria's investment-grade rating. Gross general government debt, at an estimated 18.5% of GDP in 2013, is the second lowest in the EU and less than half the 'BBB' median of 40.2%. Bulgaria is strongly committed to the currency board arrangement (CBA) that has been in place since 1997, which along with a set of fiscal rules limits the size of the general government deficit (GGD). A track record of fiscal prudence has afforded Bulgaria a measure of fiscal space. Fitch forecasts that the GGD (in ESA95 terms) will be little changed in 2014 from an estimated 1.8% of GDP in 2013, before falling slightly in 2015. The Bulgarian sovereign possesses significant buffers in the form of a fiscal reserve account equivalent to 6.3% of GDP at end-November 2013, and foreign exchange reserves worth 3x base money. These contributed to a net sovereign external position of 27.9% of GDP in 2013, well above the 'BBB' median of 1.5%. The process of unwinding pre-crisis external imbalances continues. Bulgaria had net external debt (NXD) worth an estimated 20.4% of GDP in 2013, above the 'BBB' median of 6%. This is largely the legacy of heavy borrowing by banks and corporates in the pre-crisis years, which pushed NXD to a peak of 49.3% of GDP in 2009. The high share (43%) of debt accounted for by intercompany loans is a partial mitigant. Fitch expects private sector deleveraging, small current account surpluses and a moderate economic recovery to reduce external indebtedness towards the 'BBB' median in 2015. Low trend GDP growth is Bulgaria's key rating weakness. Five-year average growth, at negative 0.3%, is well below the 'BBB' median of 3.2%. Per capita incomes are broadly in line with the 'BBB' median, but still far below the EU average. Fitch forecasts that GDP growth will only pick up gradually, to 2% in 2015, from sub-1% outcomes in 2012-13. Subdued medium-term prospects in key EU trading partners, lacklustre demand for bank loans, shortcomings in the business environment and adverse demographic trends hold back potential growth. The availability of significant EU funds (which Bulgaria is absorbing faster than in recent years) for infrastructure spending up to 2020 holds the promise of boosting potential growth. However, the latter is unlikely to rise until after Fitch's forecast horizon. Fitch does not view the banking sector as representing a significant contingent liability for the sovereign. The sector is well-capitalised and supervised, liquid and moderately profitable. However, NPLs are high at 17% of the total in 3Q13 and have yet to peak. Greek banks' subsidiaries still hold a significant percentage of total assets, but Fitch assesses the tail risks around these have receded. EU membership supports political and institutional stability, and governance indicators are in line with the 'BBB' median. Widespread protests that peaked in the summer of 2013 diminished in intensity later in the year, but continuing discontent with low living standards and perceived corruption poses the risk of renewed socio-political unrest in 2014-15. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a positive rating action are: - Greater confidence in a return to sustained stronger GDP growth, without macroeconomic imbalances. - Continued deleveraging leading to a further reduction in external indebtedness. The main risk factors that, individually or collectively, could trigger a negative rating action are: - A prolonged stagnation in GDP or a severe economic or financial shock. - Political instability that has a material impact on growth prospects or the structural reform agenda. KEY ASSUMPTIONS Fitch assumes that Bulgaria will continue to pursue prudent fiscal and monetary policies consistent with the CBA. Fitch assumes that current political and social tensions do not escalate significantly. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. The agency further assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Vincent Forest Associate Director +44 20 3530 1080 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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