site.btaMoody's Affirms Bulgaria's Baa2 Government Bond; Stable Outlook

Moody's Affirms Bulgaria's Baa2 Government Bond; Stable Outlook

Sofia, June 6 (BTA) - The international ratings company Moody's
affirmed Bulgaria's Baa2 government bonds with a stable outlook
in a report, quoted by the Finance Ministry in a Saturday press
release. 

The decision to maintain the stable outlook balances the
government's strong balance sheet, the gradual economic recovery
 and reform initiatives against the risk of external shocks such
 as a Greece exit and political risk, the Moody's report says. 
With regards to the latter, political instability that could
erode confidence and distract from fiscal and structural reforms
 cannot be ruled out considering that the ruling minority
coalition, which is formed by the Citizens for European
Development of Bulgaria (CEDB) partnered with the Reformist Bloc
 (RF), also depends on the external support of two other
parties. So far, however, this political arrangement has not
prevented the government from advancing its agenda, Moody's
concludes.

Moody's rationale for the  rating affirmation at Baa2 relates to
 the sustainability of the current level of debt over GDP and
the authorities' commitment to gradually consolidating fiscal
metrics without impairing economic growth. General government
debt increased rapidly in 2014 due to the contingent liabilities
 arising from the collapse of Corporate Commercial Bank
(Corpbank), on top of a rise in the fiscal deficit and the
planned restock of cash in the Fiscal Reserve Account (FRA).
Yet, at 27.6%, the government debt-to-GDP ratio compares
favorably with European Union (EU) and Baa2 medians (72 per cent
 and 41.2 per cent respectively). Similarly, Bulgaria's debt
affordability ratio of 2 per cent, defined as general government
 interest payments over revenue, remains materially lower than
the medians of 4.9 per cent for EU countries and 9.2 per cent
for Baa2-rated countries. The debt position provides significant
 financial flexibility and shock absorption capacity to the
government' balance sheet.
 
The second rating factor relates to the economy's shock
absorption capacity and its gradually improving growth
prospects. Despite external headwinds, deflation, and Corpbank's
 failure, Bulgaria's real growth in 2014 proved resilient, with
a slight acceleration compared to 2013 (1.7 per cent in 2014
from 1.1 per cent in 2013) which was driven by higher
consumption and investment. In 2015 and 2016, we expect that
real growth will be constrained by fiscal consolidation efforts
and come in at around 1.3 per cent and 1.8 per cent
respectively, with risk slightly tilted to the upside for this
year, stemming from positive surprise in export activity.
Moody's expects real growth to slightly accelerate in the
following years reflecting improving labour market conditions -
as the effects of the financial crisis which had resulted in
higher unemployment progressively fade - while investment
activity gradually recovers. Moody's also believes that
Bulgaria's net exports will benefit from the improved growth
prospects in the EU as a whole. On the other hand, although not
a base case scenario, a Greek exit could alter the more
supportive external conditions in Europe.

The third driver supporting the decision to affirm the rating is
 the government's reform agenda. Central to this effort and
critical to safeguarding financial stability is the
strengthening of the supervision framework of the banking
sector, which follows the collapse of Corpbank in June 2014.
Following this, the government borrowed EUR1.7 billion to
on-lend to the country's deposit insurance fund for the
repayment of insured deposits. The bank failure revealed
significant institutional deficiencies and lack of adequate
supervision. A systematic overhaul and reform of the financial
supervision and regulation framework has been launched and will
be completed in the period between mid-2015 and the end of 2016,
 comprising an assessment of compliance of the BNB supervisory
practices with the Basel Core Principles for effective banking
supervision (by the end of the second quarter of 2015),
establishing a framework for recovery and resolution (Bank
Recovery and Resolution Directive, BRRD, expected to be adopted
in the third quarter of 2015) of the credit institutions in
Bulgaria and performing an asset quality review (AQR) and stress
 test of the entire banking sector developed in direct
cooperation with the relevant bodies of the EU.

The third driver supporting the decision to affirm the rating is
 the government's reform agenda. Central to this effort and
critical to safeguarding financial stability is the
strengthening of the supervision framework of the banking
sector, which follows the collapse of Corpbank in June 2014.
Following this, the government borrowed EUR1.7 billion to
on-lend to the country's deposit insurance fund for the
repayment of insured deposits. The bank failure revealed
significant institutional deficiencies and lack of adequate
supervision. A systematic overhaul and reform of the financial
supervision and regulation framework has been launched and will
be completed in the period between mid-2015 and the end of 2016.
  

Other reforms on the government's agenda aim to address
structural issues in the labour market and pension system.
Structural impediments to economic growth, however, are
significant, including high youth unemployment, demographic
challenges related to an aging population and high levels of
emigration, corruption and a lack of physical infrastructure,
the agency reports.