Bulgaria: 950m Reasons to Be Smiling

Bulgaria tapped international markets to raise funds to repay the first tranche of about EUR 835 M (USD 1.07 B) in 11-year eurobonds maturing on January 15, 2013. File photo

Financial Times

Andrew MacDowall

In a region of teetering economies facing serious fiscal crises, Bulgaria has achieved a notable success with its sovereign bond issue this week. The Balkan country floated €950m worth of five-year bonds on Tuesday at a yield of only 4.25 per cent. Bulgaria's first euro-denominated issue since 2002 will be used to cover eurobonds maturing in January 2013. The straitened fiscal situation meant that, without the bond sale, the government might have had to dip into its pension reserves fund or turn to privatisation to cover its debt obligations.

So Sofia's decision to go to the markets was partly based on short-term budgetary shortcomings, as it emerges at a snail's pace from a deep recession that brought the boom years of the last decade to a swift and painful end as investors took flight and domestic demand stalled.

But the fact that the sale was oversubscribed, and the lowish yield, is indicative of confidence in Bulgaria's longer-term fiscal outlook. Yields on Bulgaria's bonds maturing in January for example are currently at 7.5 per cent, and other countries in the region are under much more pressure. Serbia's 53-week local currency yield reached 14.25 per cent on July 4; a Romanian issue in the middle of last month was undersubscribed. Both are reliant on international financial support. Greece's troubles surely need no repeating here.

By contrast, since its economic crisis in 1997, Bulgaria has generally followed a highly respectable fiscal path, delivering regular surpluses in the last decade when others were playing fast and loose. The more recent recession-driven budget deficit has been swiftly reigned in – the government targets 1.3 per cent this year. Public debt is just 16 per cent of GDP. The bond success could be an important step in the country's recovery.

"The sale is proof of trust in Bulgaria, the current government and its economic policy," Nadejda Dafinkicheva, head of research and corporate finance at Sofia-based First Financial Brokerage House, told beyondbrics. "The country has been unfairly punished by investors only because of its location. In that context, the rate achieved is quite deserved. According to certain sources, Bulgaria could have achieved an even better interest rate, but wanted to leave part of the gain to investors so that subsequent issues would be welcomed. Also, this rate may imply that the risk premium attached to Bulgaria has declined, bringing the corresponding changes to the parameters of other investments in the country."

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