November 16, 2017 / 11:35 AM / in a year

Bulgarian growth is not creating imbalances -S&P analyst

SOFIA, Nov 16 (Reuters) - Bulgaria’s economy is growing in line with its central and eastern European peers and there are no signs of imbalances developing, the lead regional analyst for credit rating agency Standard & Poor’s said.

Karen Vartapetov also said any admission to the euro zone’s exchange rate mechanism, a precursor to joining the single currency, would trigger a ratings upgrade.

S&P upgraded Bulgaria’s outlook to positive in June, saying there was one-in-three chance it would lift its sovereign ratings in the next year if strong growth persists and Sofia acts to further reduce non-performing loans at banks.

It assigns the European Union country a BB+ rating, one notch below investment grade and lower than rival agencies Moody’s and Fitch. A rating update is due on Dec. 1.

“Bulgaria is in line with the general trend which is that of ... extremely strong cyclical recovery in the region,” S&P’s Vartapetov said late on Wednesday.

“In the Bulgarian case, this growth is not generating imbalances like for example current account deficits or a real estate bubble. This is how Bulgaria is different.”

Vartapetov said the challenges to the Balkan country’s small and open economy are longer-term, linked to raising low wealth levels and improving effectiveness of its institutions.

Bulgaria’s financial system has steadied since its fourth-largest lender collapsed in 2014, with non-performing loans falling to 11.4 percent of the total at the end of September from 13.2 percent at the end of 2016, central bank data shows. Bulgaria’s central bank has pledged to enforce further steps to reduce bad loans.

Bulgaria’s economy grew 3.9 percent in the third quarter from a year before, putting it among the EU’s five fastest-growing, and is expected to expand by 4 percent in 2017 and nearly that through to 2020.

The government aims to end the year with a balanced budget and run a small fiscal deficit in 2018.

“What Bulgaria is doing is very much like what the textbooks actually say. And this is not what we see in other countries where the fiscal policies in CEE are very pro-cyclical, Vartapetov said, citing Romania, Hungary and Poland.

“The key issue for Bulgaria would be to use that cyclical improvement basically to deal with the longer-term constraints.”

The strong economy has encouraged Bulgaria to step up its efforts to adopt the euro and it hopes for a clear signal by year-end whether it can formally apply to join the euro zone.

Admission to the ERM-2, the two-year waiting room for euro membership, would trigger an upgrade by S&P, Vartapetov said.

Sceptics say the EU’s poorest state and most corrupt country — according to Transparency International — will need more reforms before it can adopt the bloc’s single currency. (Editing by Catherine Evans)

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