Credit ratings agency Standard&Poor’s has said that it affirmed Bulgaria’s long-term sovereign credit rating at BB+, one notch below investment grade, with a stable outlook.
This was the second time in six months that S&P affirmed Bulgaria’s ratings, following two back-to-back downgrades in 2014. It also comes a week after Fitch Ratings affirmed its BBB- rating.
The ratings agency was optimistic about economic growth, forecasting a three per cent increase in gross domestic product this year, “supported by the government’s efforts to increase the absorption of EU structural and cohesion funds.”
This estimate was helped by “a period of relative political calm”, with S&P saying that domestic demand was strengthened by “the absence of the political uncertainty that has characterized recent years and in conjunction with lower energy prices, a reduction in unemployment, and acceleration in the absorption of EU funds.”
However, the beginning of the new EU budget cycle was likely to result in slower growth over the next three years because of a lag before new public investment projects financed by EU structural and cohesion funds. Overall, the strength of the recovery, independent of elevated government spending, is still uncertain, as domestic demand has struggled to gain momentum in the years following the 2008-2009 global financial crisis, the credit ratings agency said.
“An important reason for Bulgaria’s weak recovery is that the drying up, or even reversal, of foreign inflows into the banking, construction, and property sectors – which propelled growth in the years leading up to the crisis – has not been fully offset by foreign inflows into other sectors, such as tradeables.”
S&P also said that “Bulgaria’s financial sector continues to face important challenges, but we note that efforts are underway to mitigate risks, including an asset quality review slated for 2016.” Although central bank data showed that the banking system was well capitalised, the asset quality review “could potentially expose further vulnerabilities.”
“The banking sector is also vulnerable to external factors, given the large presence of Greek subsidiaries, which together account for about one-fifth of the sector’s assets,” the agency said. Bulgaria’s central bank has taken steps to shore up the liquidity of these banks and also has been offered a line of support from the European Central Bank despite not being a member of the euro area, but the details of this support remain unknown, S&P said.
The agency said that an upgrade in Bulgaria’s credit rating could be considered “if Bulgaria effectively addresses governance issues, thereby boosting its growth potential and attracting higher foreign direct investment to the tradeables sector; or if the economy expands faster than we anticipate, such that general government finances consolidate more rapidly.” On the downside, a ratings cut was possible should the financial system require further substantial government support, or if outflows on the financial account resulted in pressures on the balance of payments.
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