06.06.2015

Moody's Investors Service (Moody's) has today affirmed Bulgaria's Baa2 government bond ratings with a stable outlook. The decision balances the government's strong balance sheet, the gradual economic recovery and reform initiatives against the risk of external shocks such as a Greece exit and political risk.

One of the key factors for the agency's decision is the supportive debt metrics that compare favourably to Baa2-rated peers. Moody's takes account of the sustainability of the current level of debt over GDP and the authorities' commitment to gradually consolidating fiscal metrics without impairing economic growth. According to the agency, the debt position provides significant financial flexibility and shock absorption capacity to the government's balance sheet. Despite the execution risks, measures already enacted or announced show that the government is committed to curbing spending and containing debt through a gradual narrowing of the fiscal imbalance.

Another factor influencing the Moody's decision relates to the resilient economy with gradually improving growth prospects in the medium-term. Moody's expects that real growth will be constrained by fiscal consolidation efforts and come in at around 1.3% and 1.8% in 2015 and 2016 respectively, with risk slightly tilted to the upside for this year, stemming from positive surprise in export activity. They expect real growth to slightly accelerate in the following years reflecting improving labour market conditions, with Bulgaria's net exports benefiting from the improved growth prospects in the EU as a whole. Structural impediments to economic growth, however, are significant, including high youth unemployment, demographic challenges related to an ageing population and others.

Among the factors mentioned by the agency is the systematic reform of the financial supervisory framework aimed at reducing banking system risks. The agency expects that the marginally positive current account registered will widen amid a narrowing trade deficit, with foreign direct investment inflows remaining stable.

You can read the full text of the Moody's press release here.