03.07.2013

In its annual credit analysis Moody\'s assesses the economic and institutional strength of the country as moderate and points out the sustainability of public finances. 

The Agency reviews economic growth since 2010 and reports that growth in 2010 and 2011 has been driven by net exports as domestic demand has remained subdued, being mainly the result of a continued process of deleveraging private sector and low foreign capital inflows. In 2012 private consumption recovered and investment resumed. Moody\'s expects real GDP to expand by 1.2% in 2013 and by 2.4% in 2014. The Agency expects as the euro area economy begins to recover towards the end of 2013, Bulgaria\'s exports to increase during the year, while growth in private consumption to increase import demand. As positive is seen the on-going and gradual diversification of exports and the reduction in natural resource-based exports.

The Agency\'s analysts forecast the pace of fiscal consolidation to slow. Their expectations are based on an assumed increase in social transfers and capital spending, and on the effect of the still-high unemployment rate, an anaemic expansion in industrial output and limited domestic demand on the revenue side of the budget. The analysts expect the budget deficit to narrow only slightly in 2014 to 1.3% of GDP as acceleration in nominal and real GDP growth is likely to be offset by continued pressure to increase social spending.

The document considers that labour market processes continue to suppress a more accelerated recovery in private consumption. Businesses, in sectors such as construction and industry, have chosen to cut staff numbers to contain labour costs, rather than lowering employee compensation. At the same time the analysis states that the level of income in the economy is below the EU median.

The Agency determines Bulgaria\'s fiscal and monetary policies as prudent and its banking system regulation as effective. The latter was extremely important in preventing the banking system from becoming a liability for the government\'s balance sheet during the global financial crisis, and has provided confidence during the euro area debt crisis.

Moody\'s assesses the political risk as low, but they note the heightened social tensions and the absence of political party enjoying the trust of the broader public. Any increase in voter agitation on the streets may raise the likelihood of populist measures being introduced and even another election in 2013. Nevertheless, there is consensus among the main political parties for the maintenance of fiscal stability, the low public debt and the currency board.