Moody's has upgraded Bulgaria's long-term ratings in foreign and local currency to Baa1, with a stable outlook.
Moody’s decision to upgrade the ratings reflects the enhanced institutional capacity and policymaking as the country enters the last phase before becoming a member of the euro area. The upgraded ratings also reflect the reduced exposure to foreign currency debt risk, large fiscal reserves and expectations that positive fiscal and debt dynamics post pandemic shock will support the government’s strong balance sheet.
The stable outlook reflects the expectations of the rating agency that fiscal strength indicators will remain resilient even under an adverse scenario, and above the median for Baa1-rated peers. The stable outlook also balances intrinsic strengths in Bulgaria’s improving economic and institutional framework with key credit challenges that predominantly relate to the negative impact of adverse demographics in the country on medium-term potential growth, as well as continued reform needs in the fight against corruption, judicial independence and the rule of law.
The first driver of the ratings upgrade is based on Bulgaria’s progress towards euro area accession and the associated strengthening of institutional capacity and policymaking. The view of the analysers is that Bulgaria’s entry in the ERM II is one of the final critical steps prior to becoming a member of the euro area. They also point out that the approval for the country’s entry in the ERM II amid the coronavirus disruption results from a comprehensive reform programme. In parallel, Moody’s also points out to the established close cooperation between the ECB and the BNB over bank supervision; the view of the agency is that it will further enhance the regulatory environment and promote the adoption of best practices.
The second driver of the ratings upgrade relates to Bulgaria’s strengthened fiscal and credit profile despite the negative impact of the coronavirus pandemic. Moody’s analysers point out that, in the case of Bulgaria, the highly credible currency board that has been in place for more than two decades already mitigates this risk arising from the high share of foreign-currency denominated debt of the country (in 2019, 80% of Bulgaria’s general government debt was denominated in euros).
Bulgaria’s credit profile also benefits from a strengthening of the government’s strong balance sheet. Four years of growing structural fiscal surpluses have brought the debt/GDP ratio to 20.4% in 2019, the second lowest level in the European Union after Estonia. The agency also reports improvement in terms of the more favourable financing possibilities – the interest payments/general government revenues ratio has dropped to 1.5% in 2019 against 2.5% in 2016. Moody’s also expects the fiscal reserves to remain stable at around 10% of GDP.
According to the agency, the pandemic will negatively affect Bulgaria’s public finances. Moody’s anticipates a 3.5% drop in GDP in 2020 before a 2.7% recovery in 2021. The expected recession and the need to support economic activity in order to address the pandemic will weigh on government revenues and public expenditure, pushing the deficit to 3.0% of GDP in 2020 and 1.6% in 2021. Moody’s forecasts the government debt to reach 23.9% in 2020 and 24.2% in 2021, before gradually declining to 23.5% in 2022.
The agency points out that the main factors that could exert upward pressure on the country’s outlook and ratings are related to significant improvements in the quality of work of institutions and a sustained convergence path towards higher living and institutional standards that would facilitate the entrance of the country into the euro area. Factors that could lead to a negative outlook and downgrade of the ratings are a marked and permanent deterioration in the government's very strong balance sheet and long-term economic growth prospects as well as the weakening in the institutional framework.
You can find the full text of the press release here.