STANDARD +ACY- Poor’s (S+ACY-P) surprisingly raised the credit rating of Bulgaria on October 27, amid a crisis related to the country’s economic future.
S+ACY-P Ratings Services said it raised its long-term foreign currency sovereign credit rating on Bulgaria to BBB from BBB-.
At the same time, the long and short-term local currency sovereign ratings on Bulgaria were raised to BBB2 from BBB/A-3, and the A-3 short-term foreign currency rating was affirmed. The foreign currency outlook is positive. The local currency outlook is stable.
+ACI-The upgrade reflects the ongoing reduction in the general government debt burden, underpinned by the maintenance of prudent fiscal policies through the recent government change,+ACI- said S+ACY-P’s credit analyst Remy Salters.
+ACI-The upward rating momentum is also supported by Bulgaria’s impending EU accession, which will help to lock in structural reforms and pave the way for the eurozone membership,+ACI- he said.
Despite the June 2005 general election and the costs of recent floods, the government is expected to post a fiscal surplus in the region of 1.5 per cent of GDP in 2005. Another small surplus is expected next year, reducing the debt burden to 30 per cent of GDP. The burden is expected to continue declining in the medium term, despite the additional spending demands triggered by EU accession.
Net foreign direct investment will cover the bulk of Bulgaria’s current account deficit in 2005, which is expected to exceed 13 per cent, and is expected to continue doing so in coming years on the back of dynamic greenfield investment.
The positive foreign-currency outlook reflects the expectation of continued macroeconomic prudence and structural reforms in the context of EU accession. Under Bulgaria’s accession treaty, membership may be pushed to 2008 instead of 2007, but a one-year delay is not likely to affect the ratings.
With its decision, S+ACY-P completely overshadowed the fears of investors after the criticism Bulgaria received in the latest monitoring report of the European Commission, which was published just two days before the rating upgrade.
It was also a surprise provided the fact that Bulgaria failed to reach agreement with the International Monetary Fund (IMF) on some financial parameters of the country’s 2006 budget.
Two points of disagreement are credit growth rates and the budget surplus. However, the Government came to an understanding with the IMF about budget structure changes and the time limits for their implementation.
The IMF is concerned about the country’s growing current-account deficit, which does not seem to bother international credit agencies. Experts comment that this is due to the ongoing debate between economists on a global scale as to whether IMF’s policies are to be trusted completely.
Meanwhile, analysts say the conservative Moody’s should follow the move by S+ACY-P. In November 2004, Moody’s upgraded Bulgaria’s foreign-currency debt to Ba1, leaving it one step below investment grade on worries about economic overheating.
Analysts have since then expected Moody’s to upgrade Bulgaria to investment grade, saying the most conservative rating agency was waiting for several key issues, including the signing of the EU accession treaty in April and the general election in June (both of which already transpired).
However, experts warn that subsequent improvements in Bulgaria’s credit ratings will be dependent on structural reforms that bolster economic development and underpin the current fiscal strengthening.
In another development on October 31, S+ACY-P said it raised the rating of the second-largest Bulgarian bank, Bulbank (owned by Italy’s UniCredit Group), to BBB from BBB-, adding also a stable outlook.
Thus the bank’s rating matched that of the state.
The increase came as a result of Bulbank’s strong position on the market and the significant support from its main shareholder, UniCredit.
