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Announcement:

Moody's places Bulgaria's Baa3 government ratings on review for upgrade

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.

RATING RATIONALE

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.

REGULATORY DISCLOSURES

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.

New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's places Bulgaria's Baa3 government ratings on review for upgrade
No Related Data.
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