13.07.2013

Fitch Ratings has affirmed Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively. The Outlook on both ratings is Stable.

According to Fitch forecasts real gross domestic product GDP will grow by 1% in 2013, followed by growth of 1.7% in 2014 and 2.3% in 2015. The Agency projects that the general government deficit (GGD) will increase to 1.7% of GDP in 2013-14. The rating reflects the low level of gross general government debt (GGGD) - at 18.5% of GDP in 2012, Bulgaria's is the second-lowest in the EU, and well below the 'BBB' 10-year category median of 35.6%. Fitch forecasts that the GGGD ratio will remain below 20% in 2013-15, and does not envisage difficulties for the sovereign in refinancing maturing debt. Bulgaria's net external debt ratio, which Fitch estimates at 28% of GDP in 2012, is higher than the 'BBB' 10-year median of 5%. However, it is trending downwards, in particular as local subsidiaries repay liabilities to parent banks.

The banking sector remains well-capitalised and supervised. Non-performing loans, at 16.9% of the total portfolio in April 2013, are high, albeit adequately provisioned against. Corporate sector indebtedness is higher than its rating peers, at 110% of GDP at end-2011 according to Eurostat. Intercompany debt was equivalent to 41% of GDP at end-2012 according to data from the IMF.

The Stable Outlook reflects the Agency's assessment that upside and downside risks to the rating are currently well balanced. Nonetheless, the following risk factors individually, or collectively, could trigger a rating action:
- Bulgaria is highly sensitive to developments in the eurozone via trade and financial links. A renewed deterioration in the eurozone debt crisis (which is not Fitch's current baseline scenario) would have a material impact on Bulgaria's economic and financial stability and could lead to a negative rating action;
- Fitch experts deem that low public debt levels afford sufficient fiscal space to accommodate a moderate increase in welfare spending. However, a material deterioration in growth prospects and fiscal performance could lead to a negative rating action;
- At the same time, implementation of key structural reforms, leading to stronger sustainable economic growth, could prompt a positive rating action in the medium term.

A subdued outlook for economic growth and low per-capita income levels relative to the peer median constrain Bulgaria's sovereign ratings. On its own, economic growth is unlikely to meaningfully reduce the income gaps compared to EU average, Fitch specifies.

EU membership underpins Bulgaria's political and institutional stability, the assessment further indicates. The demonstrations against poor standards of living and perceived corruption led to the fall of the previous, centre-right administration and are undermining support for the government. At the moment the government is a minority technocratic administration, which could hamper political stability and efforts to pass key reforms.

The credit Agency assumes that Bulgaria will continue to pursue prudent fiscal and monetary policies consistent with the currency board arrangement (CBA). Fitch further assumes that ongoing political instability is not going to escalate significantly.

The full text of the information from Fitch Ratings Ltd.