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Global Credit Research - 05 Apr 2011
New York, April 05, 2011 -- Moody's Investors Service has today placed Bulgaria's Baa3
government rating on review for possible upgrade, reflecting its
healthy government finances and ongoing improvements in institutional
strength. The outlook had been positive since January 2010.
Bulgaria's Baa3/P-3 long- and short-term country
ceilings for foreign currency bank deposits and the A1 country ceiling
for long-term foreign currency debt were also placed on review
for possible upgrade.
The main triggers for the review are:
1. A strong government balance sheet and ongoing fiscal caution,
as evidenced by the preservation of a prudential fiscal reserve and the
expected reduction of the fiscal deficit to below the EU's 3%
of GDP ceiling this year;
2. The high priority the government places on improving institutional
strength, including the more efficient absorption of EU cohesion
funds and measures taken to address still-high levels of corruption
and crime; and
3. Widespread political consensus over the maintenance of the currency
board arrangement (CBA) to safeguard macroeconomic stability, although
Moody's notes that the monetary system is potentially vulnerable
to external shocks due to the relatively high external debt and the close
connections between the Greek and Bulgarian banking systems.
Moody's says that spending restraint and the lack of a need to provide
financial support to the banking sector during the global economic crisis
allowed the Bulgarian government to maintain its favorable financial metrics
over the past few years, in spite of the emergence of fiscal deficits
in excess of the EU's 3% of GDP criteria. The commitment
to safeguarding a prudential fiscal reserve is enshrined in law.
Moreover, the government has proposed a new fiscal rule, still
in the drafting stage, to ensure that its low debt will be secured
in the future. This strategy should be supportive of the Bulgarian
currency's eventual admission into the European Exchange Rate Mechanism
II (ERM II) and subsequently, euro area accession.
Two important government priorities -- the more efficient absorption
of EU development aid and the improvement of the judicial and legal environment
-- have already demonstrated progress. Moody's foresees
deeper efforts in these areas, with the creation of specially-focused
ministries and agencies to address the underlying causes of the problems
that Bulgaria faces.
The currency board arrangement, in which the Bulgarian lev is pegged
at roughly 2 leva to the euro, has been in place for nearly 14 years
and has been successful in establishing and maintaining macroeconomic
stability. The sustainability of the CBA requires the government
to keep its debt low and its banking system well-capitalized.
Also, in order to avoid inordinate external pressures, its
basic balance of payments should be roughly in balance, with non-debt-creating
foreign direct investment (FDI) inflows covering any current account deficit
that may re-emerge as domestic demand recovers. Bulgaria
has met these conditions for the most part.
FACTORS TO BE CONSIDERED IN THE REVIEW
A key focus of the review will be in the area of public finances,
given the importance of maintaining low debt for the credibility of the
CBA. In this context, Moody's will examine the government's
medium-term budget strategy as envisioned in its forthcoming submission
of its Convergence Programme to the European Commission. In particular,
the rating agency will monitor the debate surrounding the new fiscal rule
in order to ascertain whether the envisaged restrictions will preserve
low government debt without compromising its fiscal flexibility.
Finally, Moody's will evaluate the ongoing discussions concerning
reforms to the pension system, where the goals are to expand working
lives and to further develop private pension savings in order to deepen
the domestic capital market.
Moody's review will also examine the government's stepped-up
efforts to control corruption, reduce crime and enforce border security,
with a view to assessing whether the new programs are likely to be successful
and how quickly such improvements could materialize.
In Moody's opinion, Bulgaria's growth rate will be both
lower (3%-4% instead of 6%) and more dependent
on external demand than was the case prior to the crisis. Such
a pace should nonetheless allow the country's incomes to continue
to converge towards the EU average, albeit at a slower pace than
in the 2000s. However, Moody's review will look at
whether the prospects for growth are likely to be constrained even further
by stagnant bank credit conditions, given the roughly 30%
of the system owned by Greek parent banks. Although Bulgarian banks,
which are 82% foreign-owned, are well-capitalized
and liquid despite relatively high non-performing loans,
the Greek-owned banks are a source of potential risk.
Finally, Moody's will try to evaluate how vulnerable Bulgaria's
macroeconomic stability could be to a further deepening of the Greek fiscal
and economic crisis, or to other external shocks that would put
the government finances and economy at risk. Bulgaria's external
debt metrics -- such as external debt to foreign exchange reserves
-- are already substantially weaker than the Baa median and the financial
system is heavily euroized because of the currency board. Accession
to the European single currency area probably is still too many years
away to mitigate these concerns.
PREVIOUS RATING ACTIONS AND METHODOLOGY
The last rating action related to the government of Bulgaria was implemented
on 21 January 2010, when the outlook on the government's Baa3
local and foreign currency ratings was changed to positive from stable.
On this same date, the outlooks on the foreign currency debt and
deposit ceilings (Baa1 and Baa3, respectively) were also changed
to positive from stable. The rating action prior to that was taken
on 25 September 2008, when the outlooks on the government ratings
and the foreign currency ceilings were revised from positive to stable.
The principal methodology used in this rating was "Sovereign Bond
Ratings" published in September 2008.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
Moody's Investors Service
Moody's places Bulgaria's Baa3 government ratings on review for upgrade
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