Credit ratings agency Standard&Poor’s has cut Bulgaria’s credit rating to ‘BB+’ with a stable outlook, the second downgrade in six months, which put Bulgaria’s sovereign rating below investment grade and in “junk bonds” category for the first time in a decade.
S&P cut Bulgaria’s rating to ‘BBB-‘ in mid-June, citing “structural impediments” in governance that were expected impede future growth. Over the following two weeks, Bulgaria’s central bank was forced to put the country’s fourth-largest lender, Corporate Commercial Bank (CCB), into administration and the third-largest lender, First Investment Bank (FIBank), was given liquidity assistance following a run on deposits.
“We believe that supervisory lapses helped contribute to the systemically important CCB’s problems. While the new government is seeking to reform the supervisory framework, it remains to be seen whether deeper governance issues will be addressed. In the interim, while our general debt forecast does not explicitly include future government support to banks, we believe the risk of additional support is material,” S&P said late on December 12.
The credit ratings agency said that the state loan to pay out CCB guaranteed deposits and the state aid to FIBank totalled 3.5 per cent of GDP and S&P estimated the new debt taken on by Bulgaria this year at 11 per cent of GDP – “the highest increase in gross debt since Bulgaria established its currency board in 1997.”
Bulgaria’s total government borrowing this year is capped at 8.9 billion leva, with a further 8.1 billion leva envisioned in 2015, which could come at a steeper price now that the country has lost its investment-grade credit rating.
“Challenges to Bulgaria’s banking system and a deterioration of the fiscal position have been exacerbated by a sustained deflation of consumer prices which in October were 1.5 per cent lower than in October 2013,” S&P said.
“European parent banks appear less willing and able to support their Bulgarian subsidiaries, with deflationary implications especially pronounced within the context of the currency board regime. Deleveraging of parent banks in Bulgaria has been recurrent and large-scale.”
“Bulgaria’s pre-crisis growth model, which relied upon net external borrowing and net foreign direct investment (FDI) to drive growth in the non-tradables sectors, has yet to be fully replaced with a plan to revive more diversified growth in the economy on a sustainable basis. The fallout from the above may put additional pressure on the government to spend more to support growth,” S&P said.
Commenting on the ratings cut, Finance Minister Vladislav Goranov said that the decision was a result of developments in the banking sector that came before the current government took office and could not be blamed for. He said that S&P did not take into account “some positive developments that are already fact”, such as the cabinet’s policies to reduce Budget deficit in the medium-term.
The cabinet plans to reduce the deficit to two per cent of GDP by 2017, but S&P said it expected the deficit to be three per cent in 2017 because of weaker economic growth. The credit ratings agency cut its growth forecast for Bulgaria for 2014-17 to “one per cent from just under two per cent”.
“We are aware of the position of Standard&Poor’s on how the sovereign ratings could be upgraded and we are convinced that the agency will have shortly the grounds to reconsider its opinion,” Goranov said in a statement posted on the Finance Minsitry’s website.
S&P said it could raise Bulgaria’s ratings if “governance issues are addressed effectively, boosting Bulgaria’s growth potential, attracting higher FDI into the tradables sector, or if the economy expands faster than we anticipate such that general government finances consolidate more rapidly.” On the downside, further cuts could be caused by further government support to the banking sector or continued financial outflows from the country.
(For full coverage of the CCB situation from The Sofia Globe, click here. Photo: Haydn Blackey/flickr.com)