Credit ratings agency Standard & Poor’s cut Bulgaria’s sovereign debt rating to BBB-, saying that it expected the structural institutional flaws of governance to impeded growth. The rating level is identical for long- and short-term debt, denominated in either foreign or local currency, and has a stable outlook, meaning that S&P does not expect another rating change in the near future.
The BBB- rating is the lowest rung of the “investment grade” credit ratings (as opposed to speculative grade or junk bonds). This is the closest Bulgaria has come to losing its investment grade status since the onset of the global financial crisis.
The credit agency said, in a statement late on June 13, that “Bulgaria’s structural impediments are related to governance – addressing corruption and strengthening the rule of law – and tackling the adverse demographics of net emigration and an aging population.”
“We view these factors as inhibiting growth and believe that other disruptions – such as the procedure launched by the state energy regulator to revoke the licenses of foreign electricity distribution companies – add to business uncertainty and send strong negative signals to potential investors.”
Furthermore, inefficiencies in the governance of state-owned energy and railway companies could cause liabilities to the government’s balance sheet, if unaddressed, S&P said.
Any reform effort has been complicated by the precarious state of Bulgaria’s ruling coalition and the public pressure asking for the government’s resignation, the credit ratings agency said. The tension increased after the European Parliament elections last month, in which the socialists, who hold the government’s mandate, were soundly defeated.
“As a result, we expect that the political landscape will remain volatile over the coming months and will likely not be conducive to implementing potentially unpopular reforms,” S&P said. “Absent meaningful reform progress, we expect growth to remain lackluster and unemployment high.”
“The stable outlook balances our view on the risks to growth from policy complacency against the space afforded by relatively low government indebtedness,” S&P said.
“We could lower the ratings if contingent liabilities from state-owned enterprises were to crystallize on the government’s balance sheet, if we see continued outflows in the financial account of the balance of payments, or if there is a further deterioration in the policy environment that adversely affects private investment flows and the economic recovery. On the other hand, upward pressure on the ratings could build if supply-side rigidities and governance issues are addressed effectively, boosting Bulgaria’s growth potential.”
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