Fitch Affirms Bulgaria at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed Bulgaria's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' and its Long-term local currency IDR at 'BBB'.

The Country Ceiling has been affirmed at 'BBB+' and the Short-term foreign currency IDR at 'F3', according to a media statement of the international credit rating agency published on July 4.

The issue ratings on Bulgaria's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively.

The Outlooks on the Long-term IDRs are Stable.

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.

According to the credit rating agency, the main risk factors that, individually or collectively, could trigger a positive rating action are a further, substantial reduction in external indebtedness and the implementation of key structural reforms to the business environment, including infrastructure, education and health, leading in turn to stronger trend GDP growth and progressive convergence towards average EU income levels.

According to Fitch Ratings, the main risk factors that, individually or collectively, could trigger a negative rating action are a macroeconomic or geopolitical shock that damages the small and open Bulgarian economy and a significant slippage relative to official fiscal targets, or the emergence of instability in the banking sector, eroding Bulgaria's key rating strengths.

The rating agency mentions the recent developments in Bulgaria’s sector, including the June 20 decision of the Bulgarian National Bank (BNB) to place under conservatorship the fourth-largest bank, Corporate Commercial Bank (KTB) due to a deposit outflow caused by a dispute among stakeholders and the withdrawal of BGN 800 M from another domestic bank, First Investment Bank, by depositors over negative rumors.

Fitch admits that the recent events highlight long-standing risks about corporate governance and related-party lending, which in turn weaken the business environment.

However, the rating agency argues that these developments are not of a systemic nature (the subsidiaries of EU parent banks have not experienced withdrawals) and will thus not endanger the currency board arrangement (CBA), which is backed by a high level of international reserves.

The banking sector is well-capitalised, liquid and profitable in aggregate, and non-performing loans have peaked, in Fitch's view.

Trend growth in Bulgaria remains subdued compared with 'BBB' peers, according to Fitch.

The credit rating agency expects improved prospects for household consumption to support GDP growth of 1.6% in 2014, rising to 2.5% in 2015 on the back of stronger economic activity in the eurozone, Bulgaria's key trading partner.

Fitch notes, however, that structural bottlenecks continue to prevent the stronger growth rates that would support faster convergence with western European standards of living.

The credit rating agency also informs that Bulgaria’s economy has been experiencing the deepest deflation in the EU bar Greece, related partly to exogenous food and energy price developments.

According to Fitch, Bulgaria's gross general government debt (GGGD), at 18.9% of GDP in 2013, was the second-lowest in the EU, and less than half the 'BBB' median of 40%.

Fitch's baseline scenario is that GGGD will rise modestly in the medium-term but peak at around 23% of GDP.

Despite widening to 1.5% of GDP in 2013 from 0.8% in 2012 to accommodate additional social spending, the general government deficit (GGD) remains contained. Fitch expects the GGD to widen further slightly in 2014 (an election year), before edging lower towards the medium-term objective of 1%.

Bulgaria maintains a substantial buffer in the form of the fiscal reserve, worth an estimated 7.5% of GDP in April 2014.

Bulgaria ran a current-account surplus (CAS) equivalent to 1.8% of GDP in 2013, the largest since the late 1990s. This compares with a 'BBB' median deficit of 1.4%. Fitch expects the CAS to narrow in 2014-15, as improving domestic demand boosts imports.

Alongside continued foreign parent bank deleveraging and accumulation of foreign assets by domestic banks, the trend in the current account is supportive of a further reduction in net external debt (NXD) to a forecast 9.4% of GDP in 2015, which would be in line with the 'BBB' median.

Fitch also draws attention to the insufficient progress in the spheres of judiciary and countering corruption registered in the European Commission's latest report under the Co-operation and Verification Mechanism (CVM) dated January 2014.

Fitch assumes that Bulgaria's CBA will remain in place and that governments will continue to pursue prudent fiscal, monetary and financial supervision policies consistent with it.

Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term.

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