LONDON, January 10 (Fitch) Fitch Ratings has affirmed Bulgaria's
foreign currency Issuer Default Rating (IDR) at 'BBB-' and local
currency IDR at
'BBB'. The Outlooks are Stable. The issue ratings on Bulgaria's
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
Strong public finances are the key factor underpinning for
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
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
prudence has afforded Bulgaria a measure of fiscal space. Fitch
the GGD (in ESA95 terms) will be little changed in 2014 from an
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,
exchange reserves worth 3x base money. These contributed to a
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
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,
account surpluses and a moderate economic recovery to reduce
indebtedness towards the 'BBB' median in 2015.
Low trend GDP growth is Bulgaria's key rating weakness.
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
availability of significant EU funds (which Bulgaria is
absorbing faster than in
recent years) for infrastructure spending up to 2020 holds the
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
liability for the sovereign. The sector is well-capitalised and
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
percentage of total assets, but Fitch assesses the tail risks
around these have
EU membership supports political and institutional stability,
indicators are in line with the 'BBB' median. Widespread
protests that peaked in
the summer of 2013 diminished in intensity later in the year,
discontent with low living standards and perceived corruption
poses the risk of
renewed socio-political unrest in 2014-15.
The Stable Outlook reflects Fitch's assessment that upside and
downside risks to
the rating are currently balanced. The main risk factors that,
collectively, could trigger a positive rating action are:
- Greater confidence in a return to sustained stronger GDP
- Continued deleveraging leading to a further reduction in
The main risk factors that, individually or collectively, could
negative rating action are:
- A prolonged stagnation in GDP or a severe economic or
- Political instability that has a material impact on growth
prospects or the
structural reform agenda.
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
Fitch assumes there will be progress in deepening fiscal and
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.
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Applicable criteria, 'Sovereign Rating Criteria' dated 13 August
'Country Ceilings' dated 09 August 2013, are available at
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