Bulgaria’s proposed budget revisions highlight how the summer’s bank runs, a slowing economy and over-spending are weakening its public finances, Fitch Ratings said on October 7 2014.
Low debt and contained deficits give the sovereign a significant fiscal buffer, and public finances remain a rating strength, but they will have diminished capacity to counterbalance the ratings weaknesses, Fitch said.
Bulgaria’s caretaker Cabinet, in an October 1 decision, approved revisions that forecast the 2014 fiscal deficit at four per cent of GDP, a decision taken ahead of Bulgaria’s parliamentary election on October 5.
Bulgaria’s new Parliament, the 43rd National Assembly, is expected to vote on the revisions.
The revised 2014 deficit is more than twice the previous target of 1.8 per cent.
Bulgaria may also sell an additional 4.5 billion leva of debt to finance the deficit, provide liquidity to banks, and lend money to the Deposit Insurance Fund, possibly to give to depositors in Corporate Commercial Bank (CorpBank), which was placed in conservatorship in June. (For full coverage of the CCB situation from The Sofia Globe, click here.)
The revisions demonstrate how slower growth (Bulgaria’s Finance Ministry has cut its 2014 growth forecast to 1.5 per cent from 1.8 per cent and predicts deflation, Fitch noted), over-spending in 9M14, and bank-related costs will weigh on the public finances, which have been a key rating strength.
“The next government may have little option but to adopt the revisions, given the weaker-than-expected fiscal outturns so far this year and the need to approve a 2015 budget relatively quickly,” Fitch Ratings said.
The increased borrowing would take gross general government debt/GDP to 28 per cent – still more than 10pp below the ‘BBB’ median, but well above Fitch’s existing baseline scenario of GGGD peaking at around 23 per cent of GDP in 2017-2018.
“Our ratings assessment already anticipates some fiscal deterioration, with the deficit rising to the ‘BBB’ median (2.9 per cent of GDP) this year. Under the revisions, public finances would remain a rating strength, albeit a diminished one.”
Fitch said that the elections could result in further political uncertainty, after GERB won about a third of the vote but did not achieve an outright majority.
“We expected the elections to result in another coalition government, but they have delivered a more fragmented parliament that may make building and maintaining an effective coalition difficult, even if GERB’s showing arguably represents a mandate for fiscal discipline and structural reform.”
Strong public finances and diminishing external imbalances have provided a counterweight to moderate growth and concerns about governance standards, Fitch said, “as we noted when we affirmed Bulgaria’s ‘BBB-‘/Stable rating in July”.
“The runs on CorpBank and FIBank earlier this year highlighted corporate governance problems at domestically owned companies,” Fitch said.
“Recent announcements by the European Banking Authority and European Commission that they will investigate whether depositors were treated correctly and whether Bulgaria’s deposit guarantee scheme meets EU standards highlight this issue again.”
Fitch Rating’s next scheduled review of Bulgaria’s rating is due on December 19. It will take account of how the government that emerges will address the deterioration in the public finances and the slowdown in growth, the agency said.