Fitch, S&P affirm Bulgaria’s credit rating as stable, note risks from political instability

Fitch Ratings has affirmed Bulgaria’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘, with stable outlooks, while Standard and Poor’s Global Ratings has affirmed its “BB+/B” long- and short-term foreign and local currency sovereign credit ratings on Bulgaria with stable outlook

The issue ratings on Bulgaria’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-‘. The Country Ceiling has been affirmed at ‘BBB+’ and the Short-Term Foreign and Local Currency IDRs at ‘F3’.

Fitch said that Bulgaria’s ratings are supported by its sound public finances and favourable and improving external finances.

“However, a pattern of unstable governments cloud policy outlook, potentially holding back effective structural reform, which is needed to boost long-term potential growth and raise GDP per capita levels in line with similar and higher rated peers,” Fitch said.

The resignation of Prime Minister Boiko Borisov, of the centre-right Citizens for European Development (GERB) party on November 16, has increased the likelihood for early elections in 2017 should President Rossen Plevneliev fail to have political parties agree on a new government mandate in the coming weeks, the ratings agency noted.

Since 2009, Bulgaria has had five different governments. The last early elections were held back in 2014, when a minority government consisting of the Bulgarian Socialist Party (BSP) and Movement for Rights and Freedom (DPS) became untenable.

“A pattern of unstable governments is a weakness for Bulgaria’s rating, and in Fitch’s opinion disrupts effective policy setting,” Fitch Ratings said.

Fitch does not envision any significant delay in implementing the 2017 fiscal budget. However, budget revisions by a new government could occur post-election.

“Meanwhile, with the draft election code submitted back to parliament for further discussion, after a national referendum on the bill failed to attract sufficient support, it remains unclear whether changes to Bulgaria’s electoral system will be in place in the near term.”

Fitch’s new macroeconomic baseline forecasts average real GDP growth of 2.8 per cent for 2017-2018, revised up from 2.4 per cent six months ago.

“Our upward revision reflects positive carryover effects from a much stronger 2016 real GDP outturn than projected back in June, where growth is now expected 1.3pp higher at 3.4 per cent, and above the ‘BBB’ median of 3.1 per cent. A revision to national accounts indicates a much higher contribution from domestic demand relative to net exports than previous estimates. Year-to-date, resilience in household consumption is offsetting temporary weakness in gross fixed capital formation and low government spending.”

“Our outlook of higher growth above its current five-year average of 1.8 per cent, suggest progress in convergence towards GDP per capita levels of higher rated peers,” Fitch said.

However, Bulgaria is characterised by high GDP volatility and faces structural challenges to achieving a higher and more sustainable rate of potential growth in the medium term.

“Risks to our macroeconomic baseline are balanced. A scenario of prolonged political uncertainty could weigh on economic sentiment. However, upside risks are possible from a higher than planned absorption of EU funds, resumption in credit growth or higher economic growth of Bulgaria’s main trading partners.”

Bulgaria’s fiscal performance had benefited from stronger economic growth and administrative tax measures, Fitch Ratings said.

Higher than planned receipts in tax revenues and contained government spending indicate the likelihood of a favorable budget outperformance in 2016.

Against the government’s target deficit of 1.9 per cent, Fitch now expects a deficit of 0.9 per cent of GDP (ESA 2010) for 2016, significantly below the ‘BBB’ median deficit of 2.7 per cent of GDP.

Meanwhile, government debt will increase towards 29 per cent of GDP in 2016 from 26 per cent in 2015, reflecting a EUR2bn dual-tranche Eurobond issuance back in March, but remaining below the ‘BBB’ median ratio of 40.6 per cent of GDP.

Fitch said that Bulgaria’s rating is further supported by its favourable external finances. Sustained current account surpluses in recent years and high level of foreign reserve assets covering 7.5 months of current external receipts (2015), provide stability to the country’s existing currency board regime. Trends in net external debt continue to improve, and for the first time fell below the ‘BBB’ median of 8.2 per cent of GDP in 2015, reaching 3.6 per cent of GDP from a peak of 45.2 per cent of GDP in 2009.

Fitch views the domestic banking sector as a lower probability of risk as a contingent liability on the sovereign’s balance sheet, following the results of Bulgaria’s banking sector-wide asset quality review (AQR) published in August 2016.

The AQR showed a well-capitalised sector (CET1 ratio of 21 per cent at end-3Q16), but this should be viewed against a stockpile of net non-performing loans (NPLs) equivalent to about 45 per cent of the sector’s CET1 capital.

The sector’s NPL ratio was 19 per cent at end-3Q16, one of the highest in the region. Refinancing risk in the sector is low, in view of the banks’ ample liquidity buffers, weak demand for loans and deposits growth.

S&P Global Ratings has affirmed its “BB+/B” long- and short-term foreign and local currency sovereign credit ratings on Bulgaria with stable outlook, a statement by Bulgaria’s Finance Ministry on December 2 said..

The ratings are supported by the government’s moderate net debt position, projected at 18 per cent of 2016 GDP. They also benefit from Bulgaria’s moderately leveraged external balance sheet following half a decade of external deleveraging, led primarily by the financial sector. The ratings remain constrained by the relatively low GDP per capita and the weak institutional environment, S&P said.

S&P Global Ratings noted that in 2016, Bulgaria’s economic recovery has been accelerating,  alongside improvements in the labour market, a narrowing government budget deficit, and a current account surplus.

These improvements, however, could be thwarted if the increased political uncertainty following the recent government resignation hampers economic recovery or leads to an overly lax fiscal stance.

The stable outlook on Bulgaria reflects the balanced risks from fiscal and economic uncertainty amid the political standstill, which will potentially last for several months, against expectations that fiscal space is preserved and economic recovery continues.

The conditions, under which the agency would upgrade Bulgaria’s credit ratings, include effectively addressing the problems in governance, which can improve the potential for economic growth, the Finance Ministry noted.

The ratings could also go up in the event of fiscal improvement that surpasses the agency’s expectations, and if the country manages to further reduce external vulnerabilities and liabilities.

On the other hand, the ratings could be lowered if the domestic financial system requires further substantial government support, or if outflows on the financial account resulted in pressures on the balance of payments. A weaker-than-projected fiscal consolidation path, with significant expenditure slippage or a regress on institutional advancements, could also put pressure on the ratings, S&P said.

(Photo: Darren Deans/




The Sofia Globe staff

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