Fitch Ratings, the international rating agency upgraded the Republic of Bulgaria's Long-term foreign currency rating to 'BBB' from 'BBB-' (BBB minus) and local currency rating to 'BBB+' from 'BBB'. The country ceiling is also upgraded to 'BBB' from 'BBB-'. The short-term rating is affirmed at 'F3'. Following the upgrade, the outlook is now Stable.
"Bulgaria's sovereign credit fundamentals are underpinned by sound fiscal policy and falling government debt, large foreign direct investment inflows, as well as rapid and sustainable growth. They are also supported by the good prospects for economic policy continuity with the government that has emerged from the June elections," says Nick Eisinger, Fitch Analyst for Bulgaria.
The three parties that form the new coalition government share common views on the need to maintain a prudent fiscal policy, to uphold the strictures demanded by the currency board arrangement and to finalise the reforms needed to secure Bulgaria's accession to the European Union (EU). Fitch still expects this to occur in January 2007, despite some outstanding judicial reforms and a more fluid situation within the EU itself, although the chances of a one-year delay to EU entry have increased.
A second consecutive year of fiscal surplus (over 1% of GDP) is expected in 2005 as the authorities save a portion of budget windfalls. The Fiscal Reserve Account has allowed the government to repay all outstanding Brady debt, which should underpin a reduction in general government debt to around 30% of GDP by end-2005 from 39% of GDP in 2004.
The current account deficit remains a weak spot of an otherwise strong macroeconomic backdrop, and highlights the need to bolster domestic savings and cool down the economy. However, much of the widening is driven by investment, and foreign direct investment coverage of the external shortfall is one of the highest of all countries in the 'BBB' rating range. Gross external debt remains relatively high but net external debt as a share of exports of goods and services has moderated and is well in line with those of rated peers.
The public sector in Bulgaria became a net external creditor in 2004, and this should rise to nearly 10% of GDP or 19% of current account earnings in 2005. Within the 'BBB' rating category, only Russia ('BBB'), Kazakhstan ('BBB-'(BBB minus)) and Thailand ('BBB+') are net public external creditors.
Future progress up the sovereign rating scale will in part hinge on further structural reforms designed to bolster the flexibility of the economy and enable a sustained rise in GDP per capita, an area where Bulgaria remains weak relative to rating peers. Public finances should remain sound, and falling government debt should offer flexibility when fiscal pressure rises in 2007 on EU-related issues.
The current account deficit is expected to remain sizeable, but will be heavily financed with foreign direct investments. Upon entering the EU, it is expected that Bulgaria will move rapidly to adopt the Euro, although reducing inflation to Maastricht reference levels will be a major challenge. As and when Bulgaria adopts the euro, the focus of the rating will shift from balance of payments issues to public finances and debt, where the country has a clear strength.