UPDATE 1-S&P cuts Bulgaria's sovereign rating to BBB-

Fri Jun 13, 2014 1:08pm EDT

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SOFIA, June 13 (Reuters) - Standard and Poor's Ratings Services cut Bulgaria's sovereign credit ratings by one notch to BBB- on Friday, saying the country's political environment poses risks to much-needed reforms.

S&P said the revision reflects the view that the absence of meaningful progress on reforms will constrain economic growth and keep unemployment high.

The Balkan country has been rocked by political instability in the past year, and its minority Socialist-led government is expected to resign soon after a poor showing by the ruling Socialists in European parliament's elections in May.

The downgrade underscores the challenge a new Bulgarian government will face to kickstart growth, fight rampant graft and overhaul its inefficient energy and healthcare systems after an election that will likely take place sometime in the autumn.

"Bulgaria's political environment continues to pose a challenge for the implementation of reforms needed to tackle deep-rooted institutional and economic problems," Standard and Poor's said in a statement.

"We expect that the political landscape will remain volatile over the coming months and will likely not be conducive to implementing potentially unpopular reforms," it said.

The credit ratings agency has however revised the country's outlook to stable from negative, citing the low public debt levels of the EU's poorest country.

The Balkan country's small and open economy has struggled to climb back up to growth levels seen before the global financial crisis.

It is expected to grow by just 2.0 percent this year despite a boost in government spending for the country's poorest people and increased financing for EU-backed projects.

The budget deficit has widened in the first four months to 865 million levs, more than three times the deficit a year ago, but market analysts say Bulgaria was still on track to meet its fiscal shortfall target of 1.8 percent this year.

The downgrade will probably weigh on the cost at which Bulgaria can price its pending Eurobonds of up to 1.5 billion euros, needed to fund its budget deficit and roll over maturing global bonds next January.

Bulgaria is rated at investment grade Baa2 by Moody's and BBB- by Fitch. The two hold stable a outlook. (Reporting by Tsvetelia Tsolova; Editing by Sonya Hepinstall)

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