Fitch Ratings has affirmed Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively.

The Outlook on both ratings is Stable. Fitch has also affirmed Bulgaria's Short-term rating at 'F3' and Country Ceiling at 'BBB+'

Bulgaria's 'BBB-' foreign currency IDR reflects the following key rating drivers:

- At 18.5% of GDP in 2012, Bulgaria's gross general government debt (GGGD) is the second-lowest in the EU, and well below the 'BBB' 10-year category median of 35.6%. Fitch forecasts that the GGGD ratio will remain below 20% in 2013-15, and does not envisage difficulties for the sovereign in refinancing maturing debt. The Bulgarian sovereign is a large net external creditor, at 29% of GDP in 2012, given the requirement to maintain high foreign-exchange reserves in the context of the currency board arrangement (CBA).

- A subdued outlook for economic growth and low per-capita income levels relative to the peer median constrain Bulgaria's sovereign ratings. Bulgaria remains the EU's poorest country, with per-capita GDP at 47% of the EU average in 2012. Fitch forecasts that real GDP will grow by 1% in 2013, followed by growth of 1.7% in 2014 and 2.3% in 2015. On its own, this is unlikely to meaningfully reduce income gaps.

- EU membership underpins Bulgaria's political and institutional stability. However, widespread demonstrations against poor standards of living and perceived corruption led to the fall in February 2013 of the previous, centre-right administration and are undermining support for the government. Furthermore, the goevernment is a minority technocratic administration, which could hamper political stability and efforts to pass key reforms.

- Bulgaria's net external debt ratio, which Fitch estimates at 28% of GDP in 2012, is markedly higher than the 'BBB' 10-year median of 5%. However, it is trending downwards, in particular as local subsidiaries repay liabilities to parent banks. The banking sector remains well-capitalised and supervised. Non-performing loans, at 16.9% of the total portfolio in April 2013, are high, albeit adequately provisioned against. Corporate sector indebtedness is higher than its rating peers, at 110% of GDP at end-2011 according to Eurostat. Intercompany debt was equivalent to 41% of GDP at end-2012 according to data from the IMF.

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. Nonetheless, the following risk factors individually, or collectively, could trigger a rating action:

- Bulgaria is highly sensitive to developments in the eurozone via trade and financial links. A renewed deterioration in the eurozone debt crisis (which is not Fitch's current baseline scenario) would have a material impact on Bulgaria's economic and financial stability and could lead to a negative rating action.

- Fitch deems that low public debt levels afford sufficient fiscal space to accommodate a moderate increase in welfare spending. However, a material deterioration in growth prospects and fiscal performance could lead to a negative rating action.

- Implementation of key structural reforms, leading to stronger sustainable economic growth, could prompt a positive rating action in the medium term.

Fitch assumes that Bulgaria will continue to pursue prudent fiscal and monetary policies consistent with the CBA. Fitch projects that the general government deficit (GGD, based on ESA 95 accruals methodology) will increase to 1.7% of GDP in 2013-14 from 0.8% in 2012.
Fitch assumes that ongoing political instability is not going to escalate significantly.

Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. The agency further assumes that the risk of fragmentation of the eurozone remains low.

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