(Text, released by the rating agency)
LONDON, Jan 14 - Fitch, the international rating agency, today upgraded the Republic of Bulgaria's Long-term foreign currency ratings to 'BB-' (BB minus) from 'B+'. The Long-term local currency and Short-term foreign currency ratings were affirmed at 'BB' and 'B', respectively. The Long-term Rating Outlook was changed to Stable.
The agency said that in recent months the new Bulgarian government has set out prudent fiscal targets and an ambitious structural reform programme, after an uncertain start following its election in June. Initially, the government had proposed a budget deficit of 1.5% of GDP, which looked neither consistent with its tax and spending pledges, nor sufficiently prudent given the currency board arrangement (CBA) and worsening external environment.
In December, however, parliament passed the 2002 Budget based on a budget deficit of 0.8% of GDP, opening the way to a two-year USD300 million loan agreement with the IMF. In recent months the government has also fleshed out and started to implement its structural reform plans, including completing large-scale privatisations in a transparent manner, reforming the energy sector, reducing corruption and improving the business climate. In addition, Bulgaria is continuing to make good progress towards EU accession. It closed negotiations on another four chapters of EU legislation and regulations during the tail end of last year, bringing the total closed to 14 out of 30.
Fitch said that the government's commitment to the CBA, the EU accession process and progress on structural reforms should underpin economic stability, reduce vulnerability to energy and commodity prices and raise living standards. Although the slowdown in the global economy has heightened short-term risks, Fitch expects the Bulgarian economy to bear up reasonably well, with GDP growth of 4.4% in 2001 and 4.0% this year. It expects the current account deficit to widen somewhat from 5.9% of GDP in 2000 to 6.9% in 2001 and 6.5% in 2002, which together with external debt amortisation of around USD750 million, adds up to a sizeable external financing requirement. But the financing outlook has been improved by the IMF agreement and November's EUR250 million debut eurobond, as well as prospective privatisation proceeds and green-field FDI. And Bulgaria's rating is supported by a strong liquidity position.
The agency said that the rating continues to be constrained by large, albeit declining, public and external debt ratios, which it estimates at 73.5% and 77.9% of GDP, respectively, at end-2001 (down from 107% and 96%, respectively, at end-1997). Fitch is also wary that high unemployment and declining popularity could increase the pressure on and within the coalition government to loosen fiscal discipline and backtrack on painful reform measures.
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