Fitch Affirms Bulgaria at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Bulgaria's senior unsecured foreign and local currency bonds have been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB+' and the Short-term foreign currency IDR at 'F3'.
KEY RATING DRIVERS
Bulgaria's ratings are supported by its stronger external finances relative to its 'BBB' range peers. A current account surplus is accompanied by a high level of foreign reserves, which provide stability to its existing currency board regime. However, public debt has been pushed closer to the BBB median following one-off costs to fund Bulgaria's Deposit Insurance Fund, eroding a previous rating strength. In addition, large structural weaknesses in the economy constrain potential for higher trend growth.
The economy has performed better than Fitch expected. A weak domestic sector, weighed down by negative growth in household consumption and private sector investment, has been more than offset by strong growth in net exports. With average annual growth for the first three quarters of 2015 of 2.7%, Fitch has revised up its real GDP growth forecast for 2015 to 2.5%, up 1.3pp from the June forecast. For 2016 and 2017, Fitch forecasts real GDP to average 2.6%. However, compared with 2015, the composition of GDP growth should be more balanced.
A strong net export performance means Fitch forecasts a current account surplus of around 2.0% of GDP for 2015. This compares with the 'BBB' range median of a current account deficit of 2.1% of GDP. Current account surpluses of 1.1% and 1.5% of GDP are also projected in 2016 and 2017.
Bulgaria's strong net foreign asset position (estimated at 30.5% of GDP for 2015) is a rating strength and reflects a high level of foreign reserves supporting the currency board. Total net external debt in the economy is forecast to remain above the 'BBB' median (21.3% of GDP vs 4.3% of GDP, 2015). However, this ratio has been on a sustained downward path since peaking at 46.7% of GDP in 2009. Based on IMF data, Fitch estimates that the non-financial private sector accounts for almost 70% of Bulgaria's gross external debt, half of which is intercompany lending.
One-off costs to support the repayment of guaranteed deposits in Corpbank (KTB) resulted in a fiscal deficit of 5.8% of GDP (ESA 2010) in 2014, without triggering an Excessive Deficit Procedure. For 2015, Fitch has left its fiscal deficit projection unchanged at 3.0% of GDP. Year-to-date fiscal performance shows strong revenue growth above budget plans and expenditure growth contained. For 2016, Fitch forecasts the fiscal deficit to narrow to 2.5% of GDP, as capital spending falls, but to miss the government's target of 2.0% of GDP. Our wider deficit projection assumes a slightly lower revenue forecast, but similar expenditure forecast. No major changes to tax policy have been adopted in the draft 2016 Budget. The government expects the majority of revenue gains to come from concessions and fees.
There are weaknesses in the governance and supervision of Bulgaria's banks, highlighted by the bankruptcy of KTB in 2014. The implementation of the Bank Recovery and Resolution Directive reduces the scope for state support. However, further support for the domestic banking sector remains a potential risk to the sovereign balance sheet, in our view. The eventual implementation of a sector-wide Asset Quality Review (AQR) in 2016 will add much delayed clarity over the sector's financial health, and could help restore confidence in the sector.
Bulgaria's ratings are constrained by structural bottlenecks, which continue to hamper stronger growth, and limit Bulgaria's convergence with western European standards of living. Bulgaria is amongst the poorest EU states. GDP per capita is below the 'BBB' median and 47% of the EU average.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are:
- Re-emergence of instability in the banking sector, which may increase pressure on government fiscal finances and economic growth.
- Higher fiscal deficits than projected that threatens the long-term sustainability of public finances.
- Persistent shortfall in economic growth relative to peers.
The main factors that, individually, or collectively, could trigger positive rating action include:
- Credible fiscal consolidation that supports the long-term sustainability of public debt dynamics.
- Stronger trend GDP growth and progressive convergence towards average EU income levels.
- Sustained improvement in governance and strength of institutions.
Fitch assumes that Bulgaria's currency board arrangement will remain in place and that governments will continue to pursue policies consistent with it.
Fitch assumes Bulgaria's main economic partners in the EU will benefit from a gradual economic recovery. The European Central Bank's asset purchase programme should help underpin inflation expectations, and supports our base case that the eurozone will avoid prolonged deflation. Nevertheless, deflation risks could re-intensify in case of adverse shocks.