13.12.2013

Standard&Poor's (S&P) affirmed the 'BBB/A-2' long- and short-term sovereign credit ratings of Bulgaria and revised the outlook to negative from stable. The affirmed ratings reflect the stable fiscal position of the country. The report of the credit rating agency states that in an environment of subdued economic growth, the general government deficit is expected to widen to 2% of GDP in 2013 due to the government's decision to increase social transfers and pensions and to pay down arrears to the corporate sector. This assessment coincides with the deficit target for 2013. However, the S&P analysts do not see these steps as a significant deviation from Bulgaria's robust fiscal track record or the parameters set forth in the Public Finances Act. The agency also notes that the stock of net general government debt is expected to remain still-low at 15% of GDP in 2016. The Agency confirms the ability of the government to meet its deficit targets in the period 2014-2016. The assessment of the ability for maintaining public finance stability is key for the credit rating and it has been affirmed.

Standard&Poor's analysts state as the main factor for revising the outlook to negative from stable "Bulgaria's growth prospects are being challenged by anaemic domestic demand--resulting from low credit growth and still-high unemployment-and the complex political climate, which could slow reforms". The report points out that data on real GDP growth averaging just 1% in 2010-2012 has considerably influenced the downward revision which according to S&P methodology affects the perspectives for the country's development. The analysts define domestic demand as anaemic resulting from low credit growth, constrained investment growth and high unemployment with an increasing proportion of long-term unemployment.

The Ministry of Finance agrees with the assessment about the worsened business environment and suppressed growth in 2010-2012, but cannot agree with the assumptions of the S&P's analysts about the growth prospects. The reason for that is the real GDP growth of 1.5% (seasonally not adjusted data) reported in the third quarter. Net exports are the main driver of the positive development, but an increase in end consumption by 1.2% influenced mainly by government consumption is also noted. Higher consumption and exports have an impact also on accelerated growth of imports by 8.6% y.o.y. The MoF position is also supported by the short term indicators that also show positive developments in the past months in support of increased consumption. Retail trade is growing for four consecutive months to reach 6.9% in October. The index of industrial production is also on a positive territory for two months in succession, the improved activity being due to domestic sales that increased in October. An improvement in the assessment of entrepreneurs in industry of the current business situation is also noted. The still-high unemployment in the past months is accompanied by work force growth as discouraged again register on the labour market due to the fact that growing economic activity gives them ground to believe that they could find a job. This is one of the key indicators showing changed trends on the labour market and creating expectations for growth.

The Ministry of Finance believes that the main concerns of Standard&Poor's are influenced by the unstable political situation in the country during the passing year. The agency appreciates the political environment as challenging in 2013 taking into account the political tension in the country as well as that judicial system and public procurement process would benefit from strengthening, the latter in fact coinciding with the government's priorities. The revision of the outlook shows that the creation of political instability and the non-recognition of legitimate democratic process results affect the ratings of the country. In their report S&P further state that if the political situation stabilizes, allowing the institutions to strengthen, they believe that this would likely improve the country's growth prospects and thus the downward pressure on Bulgaria's ratings could ease.

"The measures taken by the government in the first months of its term of office are focused to reinstating the government's role as a reliable business partner, bringing the economy of the country on the path of sustainable growth and improving the business environment, encouraging investment and employment and ensuring the necessary social protection of vulnerable groups of society. A number of measures to lower the administrative burden on the businesses and to promote economic growth after a long period of constraining investment, whose implementation will considerably facilitate business activities and improve access to public services, are already in place", Minister of Finance Petar Chobanov commented.