Fitch Affirms Bulgaria at 'BBB-'; Outlook Stable

Fri Jul 4, 2014 4:07pm EDT

(The following statement was released by the rating agency) LONDON, July 04 (Fitch) Fitch Ratings has affirmed Bulgaria's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' and its Long-term local currency IDR at 'BBB'. The Country Ceiling has been affirmed at 'BBB+' and the Short-term foreign currency IDR at 'F3'. The issue ratings on Bulgaria's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Outlooks on the Long-term IDRs are Stable. KEY RATING DRIVERS The affirmation of Bulgaria's sovereign ratings reflects the following key factors: - Recent developments in the banking sector highlight long-standing risks about corporate governance and related-party lending, which in turn weaken the business environment. In late June the central bank placed the fourth-largest bank, Corporate Commercial Bank (KTB) under conservatorship after a dispute among stakeholders led to a deposit outflow. Subsequently, another domestic bank, First Investment Bank, saw depositors withdraw BGN800m (EUR409m, 10% of its customer deposit base) on the back of negative rumours. Despite fairly weak corporate governance, relatively strong liquidity and capital buffers allowed them to withstand the deposit outflow. On Monday the Bulgarian National Bank (BNB, the central bank) approved a precautionary credit line for banks experiencing liquidity shortages. Fitch's base case is that these developments are not of a systemic nature (the subsidiaries of EU parent banks have not experienced withdrawals) and will thus not endanger the currency board arrangement (CBA), which is backed by a high level of international reserves. In May 2014 these were equivalent to over 1.7x narrow (M0) money supply, as defined by the BNB. The banking sector is well-capitalised, liquid and profitable in aggregate, and non-performing loans have peaked, in Fitch's view. - Trend growth remains subdued compared with 'BBB' peers. Improved prospects for household consumption should support GDP growth of 1.6% in 2014, rising to 2.5% in 2015 on the back of stronger economic activity in the eurozone, Bulgaria's key trading partner. However, structural bottlenecks continue to prevent the stronger growth rates that would support faster convergence with western European standards of living. Moreover, the economy has been experiencing the deepest deflation in the EU bar Greece, related partly to exogenous food and energy price developments. - Bulgaria's gross general government debt (GGGD), at 18.9% of GDP in 2013, was the second-lowest in the EU, and less than half the 'BBB' median of 40%. Fitch's baseline scenario is that GGGD will rise modestly in the medium-term but peak at around 23% of GDP. Despite widening to 1.5% of GDP in 2013 from 0.8% in 2012 to accommodate additional social spending, the general government deficit (GGD) remains contained. Fitch expects the GGD to widen further slightly in 2014 (an election year), before edging lower towards the medium-term objective of 1%. Bulgaria maintains a substantial buffer in the form of the fiscal reserve, worth an estimated 7.5% of GDP in April 2014. - Bulgaria ran a current-account surplus (CAS) equivalent to 1.8% of GDP in 2013, the largest since the late 1990s. This compares with a 'BBB' median deficit of 1.4%. Fitch expects the CAS to narrow in 2014-15, as improving domestic demand boosts imports. Alongside continued foreign parent bank deleveraging and accumulation of foreign assets by domestic banks, the trend in the current account is supportive of a further reduction in net external debt (NXD) to a forecast 9.4% of GDP in 2015, which would be in line with the 'BBB' median. - EU membership underpins Bulgaria's political and institutional framework. However, the European Commission's latest report under the Co-operation and Verification Mechanism (CVM), dated January 2014, highlights several institutional areas where progress has been insufficient to date, for instance independence and efficiency of the judiciary, and countering corruption. 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: - Implementation of key structural reforms to the business environment, including infrastructure, education and health, leading in turn to stronger trend GDP growth and progressive convergence towards average EU income levels - A further, substantial reduction in external indebtedness The main risk factors that, individually or collectively, could trigger a negative rating action are: - A macroeconomic or geopolitical shock that damages the small and open Bulgarian economy - Significant slippage relative to official fiscal targets, or the emergence of instability in the banking sector, eroding Bulgaria's key rating strengths KEY ASSUMPTIONS Fitch assumes that Bulgaria's CBA will remain in place and that governments will continue to pursue prudent fiscal, monetary and financial supervision policies consistent with it. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. 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. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. 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