S&P raises Bulgaria’s rating to BBB, outlook remains positive

Standard&Poor’s (S&P) raised Bulgaria’s long-term foreign currency credit rating by one notch to BBB and maintained a positive outlook in its latest rating review. The agency motivated its decision with the country’s strong fiscal and external balance sheets and added that the Bulgarian economy is growing without building macroeconomic imbalances. In addition, S&P’s upward revision of the rating was related to Bulgaria’s progress regarding its prospects to join the ERM-II mechanism.

The upgrade overall reflected S&P’s projections for resilient economic growth and strong fiscal performance in the short run. Bulgaria has managed to come up with budgetary surpluses in the 2016-2018 period and will possibly do so in 2019 and the upcoming years, the agency said. Bulgaria’s net government debt fell by 6pps compared to 2014 and the current account has a strong surplus compared to its balanced position in 2015, the agency continued. Accordingly, the low government and private sector debt levels, as well as the CA surpluses facilitating external deleveraging, can be seen to provide sufficient buffers for Bulgaria in case of external shocks. GDP growth has not been tied to growing macroeconomic imbalances, S&P also said. The agency considered that external competitiveness has been maintained despite the tight labor market in the country.

S&P expects a 3.6% GDP growth in 2019 on the back of strong private consumption. Economic growth is projected to ease to an average of 3% in 2020-2022 due to weaker external demand. Domestic demand will remain robust on the back of continuing rapid real wage growth and accelerating EU fund absorption, S&P said. A major risk to economic growth will stem from Bulgaria’s shrinking working-age population. The demographic crisis will also require continued structural reforms to address judiciary system efficiency, labor market shortages, corruption and other pressing issues, according to the rating review.

Another positive factor supporting Bulgaria’s rating upgrade was the completion of necessary steps under its action plan for ERM-II and EU’s Banking Union membership, S&P said. The agency believed that institutional convergence has progressed given the legislation alignment, including the implementation of EU legislation on the Bulgarian National Bank and macro-prudential supervision, the amendments in the insolvency framework, the framework for state-owned enterprise management, non-banking supervision and anti-money laundering legislation.

S&P will raise further Bulgaria’s rating if the economy continues its resilient growth without compromising with its fiscal position or in case the external performance improves beyond the projections. Any structural and institutional improvements could also result in a new upgrade of Bulgaria’s rating. On the downside, the outlook could be revised downwards to stable in case of external financing pressures or the accumulation of significant macroeconomic imbalances, S&P said.

PM Boyko Borissov commented that S&P’s upward revision of Bulgaria’s rating reflected the government’s efforts to improve its finances. Finance minister Goranov added that Bulgaria now has the highest rating among its peers on the entire Balkan Peninsula, which is a signal that Bulgaria is economically stable and provides higher security for investors.

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