Fitch Affirms Bulgaria's IDRs at 'BBB'; Outlook Stable

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Fitch Ratings has affirmed Bulgaria's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB'. The Outlook is Stable and the Short-Term Foreign and Local Currency IDRs have been affirmed at F2, the Finance Ministry reported Friday, citing a report by Fitch.

According to Fitch, Bulgaria's ratings are supported by its sound sovereign balance sheet and credible policy framework aimed towards gradual accession to eurozone membership. The economy is currently at a strong cyclical position and this will help Bulgaria's gradual convergence process towards higher income levels of higher rated sovereigns.

Bulgaria looks set to maintain economic growth above the average rate of its 'BBB' category peers. After real GDP growth of 3.6 per cent in 2017, Fitch forecasts Bulgaria to grow 3.7 per cent and 3.4 per cent in 2018 and 2019, respectively. This compares with an average of 3.3 per cent across its rating peers. Headline GDP growth will be mainly driven by domestic demand. Positive employment prospects, higher real wages and improved consumer confidence will support growth in household consumption. Private and public sector investment look set to rebound from a low base given the later stage of the EU structural fund cycle, favourable financing environment and improved business sentiment, Fitch said.

The strength of Bulgaria's sovereign's balance sheet remains a key support to its rating. Data revisions show Bulgaria achieved fiscal surpluses since 2016 (0.2 per cent of GDP in 2016 and 0.9 per cent of GDP in 2017). Based on current fiscal policies, surpluses will remain in 2018-2019, with Fitch forecasting an average surplus of 0.1 per cent of GDP. A lower surplus reflects higher government spending, consistent with higher absorption of EU funds and increasing spending in priority sectors such as education, healthcare and defence. This includes an increase in public sector wages and various social benefits. Bulgaria has the fourth-lowest revenue to GDP ratios among EU states, although it is above the 'BBB' median. Tax policy remains focused on indirect taxes (hikes in excise duties) and tackling the shadow tax economy.

Bulgaria's external finances outperform the majority of its 'BBB' peers. Gains in export market shares, sustained export competitiveness, anchored by real effective exchange rate stability, are set to continue supporting current account surpluses. Stronger domestic activity will result in a widening of the goods trade deficit, while dividend payments abroad will lower the income balance on account of the improved financial health of corporates. Nonetheless, Fitch forecasts an average current account surplus 1.9 per cent of GDP for 2018-2019. This compares with a projected median current account deficit 0.7 per cent of GDP for 'BBB' peers.

Bulgaria also has a stronger net external creditor position than its peers. In 2017, this reached 15.9 per cent of GDP, from net debt of 45 per cent in 2009. The median net external creditor position of 'BBB' category peers was 3.5 per cent of GDP. External buffers are also high. Foreign reserves accounting for 47 per cent of GDP, covering 8.6 months of imports, in addition to external liquidity at 296 per cent (end-2017), provide more than adequate liquidity support for Bulgaria's long-standing and credible currency board regime, Fitch reports.

Developments in the banking sector have been stable. Consistent with higher economic activity, credit demand has moderately picked up. Credit supply is ample. The sector's common equity Tier 1 capitalisation ratio was 20.4 per cent end-2017. Asset quality has stabilised but non-performing loans (NPL) remain high. The gross NPL ratio (excluding exposure to banks) improved to 14.8 per cent at end-2017 (end-2016: 18.3 per cent), but remains high by EU standards. Efforts towards improving insolvency legislation, banking supervision and reduction of corporate NPLs are ongoing.

Bulgaria's governance indicators are in line with its 'BBB' category peers. There remains broad political consensus in favour of further EU integration, with the government expressing strong intentions in recent months for its preference to join ERMII as a first step towards eurozone membership.

The main factors that could lead to positive rating action are stronger medium-term GDP growth potential and progressive convergence towards income levels of higher rate peers, Fitch said.

The main factors that could lead to negative rating action, according to the Agency, are re-emergence of external imbalances, for example from prolonged widening of the current account deficit and/or deterioration of external competitiveness; fiscal deficits that result in deterioration of the public debt trajectory; materialisation of contingent liabilities on the sovereign's balance sheet, for example from state-owned enterprises.

Source: BTA







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