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Rating Action:

Moody's upgrades Bulgaria's government ratings to Baa2/stable from Baa3

22 Jul 2011

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
No Related Data.
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