Fitch ups Bulgaria’s rating outlook to positive, affirms BBB

Fitch Ratings upped the outlook on Bulgaria’s long-term foreign-currency rating from stable to positive and affirmed the rating itself at BBB on Mar 22. The rating agency’s revision of the outlook was a reflection of a better performance registered in some of Bulgaria’s indicators compared to peer countries with BBB rating, in particular the improvement in external finance metrics. The CA surplus outperformed the preliminary estimates and was 4.5% of GDP in 2018, Fitch noted. The net asset position also strengthened to approximately 17% of GDP at end-2018, up by 40pps since 2013. Nevertheless, the CA surplus was expected to narrow given the downside risks from weaker external demand and labor costs’ pressure on local companies’ competitiveness, the agency projected. Still, Fitch assessed that Bulgaria has been able to maintain external competitiveness by switching to higher value added production and productivity growth. In addition, the abundant FX reserves, estimated at 45.4% of GDP at end-2018, alongside the stable currency board regime, were seen as quite helpful in containing external risks.

Bulgaria also registered outperformance in the fiscal/debt position indicator compared to peers. The budget surplus was estimated at 1.9% of GDP on an accrual basis in 2018 compared to the current BBB peers median deficit of 1.8%, which is Bulgaria’s best performance in the past 20 years, Fitch pointed out. The budget surpluses were likely to deteriorate slightly in 2019-2020 due to higher projected spending to cover rising wages, social contributions and capital expenditure but the risks are limited taking into account the government’s commitment to prudent fiscal policies, Fitch said.

The general government debt ratio to GDP was assessed at 22.5% of GDP at end-2018 and was expected to fall to 19% by 2020. Fitch highlighted contingent liabilities related to problematic state-owned companies as the main risk for the government debt level. On the upside, the large fiscal reserves and the very low debt-servicing costs should remain supportive of the public debt sustainability, the agency said.

After slowing to 3.1% in 2018, GDP growth should accelerate to 3.3% in 2019 and 2020, Fitch said. The agency expected a recovery in net exports, although there are downside risks related to external demand. Nevertheless, Bulgaria is less vulnerable from weaker external demand as the majority of its exports are for final consumption demand, Fitch noted.

The agency will revise upward Bulgaria’s rating in case of further improvements in the external and fiscal balance sheets, as well as if Bulgaria succeeds in entering ERM-II. Faster convergence with the income levels of higher-rated peers could also boost Bulgaria’s rating. On the other hand, a negative rating action might take place in case of re-emergence of external imbalances and deteriorating external competitiveness. A potential sharp increase in public debt due to the materialization of contingent liabilities is another risk that could drive Bulgaria’s rating downwards, Fitch warned.

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