New York, July 22, 2011 -- Moody's Investors Service today upgraded Bulgaria's government debt ratings
to Baa2 from Baa3, reflecting its ongoing fiscal discipline and
improving institutional strength as well as the financial system's relative
resilience in a volatile regional environment. The rating outlook
is stable. This rating action concludes Moody's review for
possible upgrade that was announced on 5 April 2011.
Moody's said today's upgrade of Bulgaria's government ratings was motivated
by the following three factors:
1. Effective fiscal consolidation supplemented by recent structural
reforms, which are expected to maintain Bulgaria's very low
debt burden by leading to a further reduction in the general government
deficit to below the 3% Maastricht limit in 2011 and roughly balanced
budgets in the years to come;
2. Strengthened institutional capacity thanks to determined efforts
to increase the absorption of EU funds and to reform systems such as the
judiciary and the police in order to improve the rule of law; and
3. Strong liquidity and capital buffers of both the financial system
and the government, which in Moody's opinion are sufficient to absorb
shocks deriving from regional volatility.
In related actions, Moody's also upgraded Bulgaria's country ceiling
for foreign currency deposits to Baa2/P-2 from Baa3/P-3,
and aligned the country ceiling for local currency deposits to the Baa2
level (down from Baa1) because of Bulgaria's currency board arrangement
in which the Bulgarian lev is pegged to the euro. In addition,
the country ceiling for foreign currency debt was raised from A1 to Aa3,
equivalent to the Aa3 country ceiling for local currency debt.
RATING RATIONALE
Moody's Baa2 rating takes into account successive Bulgarian governments'
strong track record in managing the public finances over more than a decade
and policymakers' clear determination to maintain such discipline going
forward.
"We expect the general government financial balance to show a deficit
below 3% of GDP in 2011, as evidenced by the results already
achieved in the first half of the year," said Moody's. "Moreover,
the implementation of the latest pension reforms and the new "Financial
Stability Pact" are likely to help keep the government finances close
to balanced over the medium- to long-term."
A second factor underlying Bulgaria's upgrade is its improving institutional
framework. The central bank has been very effective managing its
currency board and implementing sound prudential bank supervision,
and the Finance Ministry has provided strong guidance on such important
milestones as the establishment of the new fiscal rule and tighter procedures
for expenditure control. Progress has also been noted in improving
the judicial and legal enforcement systems, although implementation
of newly-strengthened procedures still has some way to go,
as noted in a recent EU report. Already there has been a marked
increase in the absorption of EU structural and cohesion funds,
and further coordination of such programs with needed infrastructural
expansion is also underway.
Finally, Moody's noted that Bulgaria's government finances and its
banking system are expected to weather the impact of the Greek debt crisis
thanks to substantial liquidity and capital buffers. Having replenished
the government's fiscal reserves to a comfortable level, it is well-equipped
to handle a more adverse than expected environment. The banking
system's capital buffers should also be sufficient to absorb additional
potential shocks, whether emanating from even-higher nonperforming
assets or the regional debt crisis, without needing to raise more
capital or government support. In any case, Moody's does
not expect any direct financial support to be forthcoming from the central
bank or the government to the banks because of the pressure it would exert
on the currency board arrangement (CBA). Still, the central
bank does have policy tools that could be used to boost liquidity if required.
The rating agency also noted that the economy rebalanced itself in the
past few years, eliminating very large current account deficits
with a remarkably shallow recession compared to those experienced in other
currency board countries at similar rating levels. The currency
board arrangement 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.
Moody's pointed out that economic growth has resumed in Bulgaria,
thus far mainly thanks to external demand. Both consumption and
credit demand are still very weak, with unemployment much higher
than before the recession. Although foreign direct investment and
other private capital inflows are likely to be permanently lower in the
years ahead, substantial new investment projects are being planned
that are likely to bring in meaningful capital. Competitive wages
and low tax rates should continue to attract private sector investment,
while public investment will be at least partially financed by EU funds.
Aside from the new Financial Stability Pact, which is a strict but
simple fiscal rule, the new Convergence Programme outlines a plan
to virtually eliminate the budget deficit in the next three years,
and the National Reform Programme eyes structural reforms intended to
reinforce macro- and socio-economic stability over the longer
term.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade is likely should economic convergence lead to ERM II entry,
given that eventual membership in the euro zone will provide a smooth
exit strategy from the currency board arrangement and reduce external
vulnerabilities. However, a serious deterioration in external
liquidity and/or a persistent weakening of fiscal policy that causes government
debt to rise significantly would put downward pressure on the government's
ratings.
PREVIOUS RATING ACTIONS AND METHODOLOGY
The last rating action related to the government of Bulgaria was implemented
on 5 April 2011, when the government's Baa3 local and foreign
currency ratings were placed on review for possible upgrade, along
with the country ceilings for long- and short-term foreign
currency debt and deposits. The rating action prior to that was
taken on 21 January 2010, when the outlook on the government ratings
and the foreign currency ceilings was revised from stable to positive.
The principal methodology used in this rating was "Sovereign Bond
Ratings" published in September 2008.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com
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 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 Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
New York
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Bulgaria's government ratings to Baa2/stable from Baa3
