S&P places Bulgaria rating on negative watch

NEW YORK, Oct 23 (Reuters) - Standard & Poor's on Thursday placed Bulgaria's credit rating of "BBB+/A-2" foreign and local currency sovereign debt on CreditWatch negative on concerns over the country's heightened external vulnerabilities.

"Bulgaria's economy had been overheating when it entered the current period of credit market turmoil. In the eight months through to August, the country's current account deficit reached 14 percent of GDP," S&P said in a statement.

Foreign direct investment, which in 2007 fully covered the current account deficit, is declining as the property and construction sectors suffer.

Bulgaria's financial system is dominated by foreign banks, and given the current market conditions, some of the banks may be reluctant to add to their existing cross-border exposure, leading to a slowdown in credit growth.

In August, inflation was running 11 percent year-on-year, and domestic claims on the non-government sector grew 48.3 percent year-on-year, while current account receipts do not match gross external financing needs.

"We expect the general government surplus to exceed 3.5 percent of GDP in 2008, general government debt to reach 15 percent of GDP, and liquid fiscal assets to rise to around 17 percent of GDP," S&P said.

"A resolution of the CreditWatch action is likely this month pending further information from the sovereign regarding its response to the intensifying pressures resulting from external imbalances," the agency added.