Fitch Ratings has revised Bulgaria’s outlook to positive from stable while affirming the sovereign’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB-‘.
The issue ratings on Bulgaria’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-‘, the ratings agency said in a June 2 statement, quoted by Bulgaria’s Finance Ministry.
The Country Ceiling has been affirmed at ‘BBB+’. The Short-Term Foreign and Local Currency IDRs have been affirmed at ‘F3’, Fitch said.
Explaining the decision, the ratings agency said that Bulgaria’s external metrics have improved markedly.
“A prolonged and steady deleveraging and positive current account trends helped Bulgaria turn into a small net external creditor to the tune of 1.6 per cent of GDP in 2016. This compares with the 0.5 per cent of GDP median net debtor position of its ‘BBB’ peers, and demonstrates a strong adjustment from a peak net debtor position of 45.2 per cent in 2009.”
Fitch noted that in 2016, Bulgaria recorded a current account surplus of 4.2 per cent of GDP, outperforming the median 1.5 per cent deficit of its ‘BBB’ peers, and above the five-year average of 0.9 per cent of GDP.
Gains in export performance and competiveness are set to underpin current account surpluses forecast by Fitch at an average of 3 per cent for 2017-2019.
The improvement in external finances is bolstered by foreign reserves covering 8.7 months of current external receipts (BBB median 6.6 months), which provide strong support to Bulgaria’s long-standing and credible currency board regime, Fitch Ratings said.
Fitch also explained three “medium” factors in its decision.
It said that Bulgaria’s public finances compare favourably with ‘BBB’ peers.
Fitch forecasts a fiscal deficit of 0.6 per cent of GDP in 2017, well below the projected ‘BBB’ median (2.4 per cent of GDP). Fitch expects public debt will decline to 26.7 per cent of GDP in 2017, below rated peers (40.9 per cent of GDP), due to the repayment of a pre-financed bond.
Public debt sustainability is supported by a low share of interest payments to revenue (2.3 per cent, 2016) and a long average residual debt maturity.
GDP growth has strengthened, the ratings agency said.
“After average growth of 1 per cent over 2010-14, real GDP accelerated to 3.5 per cent in 2015-16. Fitch forecasts Bulgaria’s economy to grow 3 per cent in 2017-18, in line with the five-year median growth of its ‘BBB’ peers.
“Risks to the growth outlook are balanced and highly dependent on both private and public sector investment activity. Higher growth can come from higher-than-forecast public expenditure of EU structural funds and/or a sustained resumption of credit growth. An underperformance of both factors would risk lower economic growth.”
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 a sector-wide asset quality review (AQR) published in August 2016.
“However, shortcomings have been identified in the latest published IMF Financial Sector Assessment (FSAP), which called for a strengthening of supervision and governance, a more robust financial safety net for times of crisis management, as well as a resolution of the high level of non-performing loans (NPLs) in the sector,” the ratings agency said.
Fitch said that Bulgaria’s ‘BBB-‘ IDRs also reflected key rating drivers.
One was that the appointment of a new government in early May “offers economic and fiscal policy continuity”.
Prime Minister Boiko Borissov of the centre-right GERB party with its junior coalition partner nationalists United Patriots replaces the former GERB-Reformist Bloc cabinet, and will have the task of preparing Bulgaria for its EU Presidency in 2018.
“A history of unstable governments means the stability of a GERB-United Patriots coalition is not guaranteed. While there is broad-based political commitment towards pro-EU policies, a changeable political environment can disrupt effective policy-setting – the latest example being related to changes in budgetary measures.”
World Bank governance indicators are in line with the peer median, Fitch said
It added that Bulgaria’s GDP per capita is below the median level of ‘BBB’ peers and higher rated sovereigns.
“Progress in income convergence will depend on how effective authorities push ahead structural reform, where labour market rigidities remain a key challenge against worsening demographics.”
The agency said that key assumptions in its announcement were that Fitch assumes the Bulgarian authorities will maintain continuity in economic and fiscal policy, and that the global economy performs in line with Fitch’s Global Economic Outlook.