site.btaMoody's Affirms Bulgaria's Baa2 Issuer Ratings, Stable Outlook

Moody's Affirms
Bulgaria's Baa2 Issuer Ratings,
Stable Outlook


Sofia, May 27 (BTA) - Moody's Investors Service has affirmed the Government of Bulgaria's Baa2 long term issuer rating, the Baa2 senior unsecured rating and the (P)Baa2 long term senior unsecured MTN program rating. The outlook remains stable, the Finance Ministry said in a Saturday press release.

The affirmation of the rating with stable outlook balances the following key rating factors: Bulgaria's resilient economy and robust medium-term growth prospects, supported by predictable macroeconomic policies, the government's strong balance sheet with a low and declining debt level as well as sizeable fiscal
reserves, and Bulgaria's structural challenges, including adverse demographic developments and a pronounced skill mismatch.

The Bulgarian economy has experienced a steady recovery over the past two years, with real GDP growth accelerating to 3.6 per cent and 3.4 per cent in 2015 and 2016, respectively. The growth recovery is broad based with private consumption strengthening and net exports rising on the back of improved external demand and improved competitiveness. On the production side, the key sectors driving Bulgaria's strong growth momentum include manufacturing, real estate and trade services sectors.

Moody's expects the country's growth performance to continue benefiting from the improved labour market conditions over the next years, as wages rise faster than inflation. Domestic demand is projected to be additionally strengthened by credit expansion, given a confidence boost from the central bank's asset quality review and a stress test completed in August 2016. Lending has already resumed, with private credit growth picking up from negative territory to 1.5 per cent year-on-year in December 2016 after almost two years of contraction and Moody's expects this upward trend to continue in the year ahead. Additionally, Moody's expects investment to resume its positive contribution to growth owing to greater absorption of EU funds. Overall, Moody's forecasts real GDP growth of 2.9 per cent in 2017 and 2018.

Another driver of the rating action is based on the government's strong balance sheet with low and declining debt levels, as well as sizeable fiscal reserves. Bulgaria has made significant progress in restoring its fiscal position. Preliminary data for 2016 show a fiscal surplus of 1.6 per cent of GDP on a cash basis and a balanced budget in ESA 2010 terms, representing a sharp fiscal consolidation since 2014 when the cash deficit was -3.7 per cent of GDP and the deficit on ESA terms was -5.5 per cent of GDP.

The Agency expects a fiscal deficit of 0.6 per cent of GDP in 2017, reflecting an increase in both revenues - in line with our expectation for continued growth momentum - and expenditures as greater absorption of EU funds supports increased capital expenditures. Overall, Moody's projects the fiscal deficit to remain narrow, comfortably reaching the authorities' target of fiscal balance by 2020.

Moody's also projects a decline in Bulgaria's general government debt-to-GDP ratio to 23 per cent of GDP by 2020, from a peak of 29.5 per cent of GDP in 2016. Moreover, Bulgaria's debt ratio is significantly below the median debt ratio for Baa2 rated peers.

The third driver of the affirmation of the Baa2 rating with stable outlook relates to Bulgaria's structural challenges, particularly an ageing population, emigration and skills mismatch of the workforce which constrain the labour supply and weigh on the economy's longer-term potential growth outlook.

Bulgaria's population has declined by an average of 0.8 per cent annually over the past two decades mainly due to emigration and declining fertility rates. According to the European Commission (EC), these trends will cause Bulgaria's old age dependency ratio to increase from 46 per cent in 2013 to 55 per cent by 2030, one of the highest among European countries. Bulgaria also has a relatively high dispersion of employment and unemployment rates across skill levels compared to other European countries pointing to a higher skills mismatch of the labour force, an additional constraint on the country's falling labour supply.

Upward rating pressure would be likely should fiscal consolidation resume at a significantly faster pace, bringing government debt levels closer to pre-crisis levels.
On the other hand, a rating downgrade could be triggered in case of renewed political volatility which interferes with policy making and undermines the government's commitment to stable macroeconomic policies; and although unlikely
given regulatory reforms, renewed stress in the banking system; and signs of a reversal in the authorities' commitment to containing budget deficits and the public debt stock. PK/MY

/МЙ/