Bulgaria: S&P Negative Outlook Reflects Harsh Reality
by Andrew MacDowall
Bulgaria’s government has been besieged by protesters for six months, and oversees an economy that has averaged growth of just 1 per cent since 2010. Those were the main factors behind Standard & Poor’s recent decision to revise its outlook for the country to “negative” from “stable”.
The change may be unwelcome, but merely reflects the difficult economic and political situation. Will it affect Bulgaria’s fledgling recovery?
“We expect economic stagnation in 2013, with higher public consumption and net exports almost completely offset by anaemic household consumption and private investment growth,” S&P said. “We also believe that the uncertain political environment and the possibility of early elections will slow the adoption of reforms, weighing on potential economic output.”
The outlook change keeps ratings for long and short term sovereign debt at the investment-grade level of BBB/A-2. But the decision has still drawn an angry response from Economy Minister Dragomir Stoynev, who accused the agency of making a “purely political” decision without basis in the government’s economic or social policies, according to Bulgarian news service Novinite.
Bulgaria’s economy was something of an investor’s darling in the middle of the last decade, as optimism linked to EU accession in 2007, pro-business reforms and broad appetite for emerging market assets stimulated growth. The global economic crisis hit the country late, but hard, and since a deep recession in 2009 there has been little growth. The eurozone’s difficulties have acted as a drag on exports and investment, while incomes and consumer confidence remain low – though retail sales are rising again, according to official figures. The real estate sector, previously a magnet for investment, only occasionally shows signs of life. The IMF expects growth of just 1.6 per cent next year.
The government, a supposedly technocratic administration, is backed by a tenuous coalition of socialists and an ethnic Muslim party, relying on support from the unambiguously-named far-right Ataka (“Attack”) party. As S&P notes, an early election is widely expected next year.
But despite the difficulties of the past few years, and an uncertain future, Bulgaria’s respectable credit rating reflects its strengths. These include very low public debt, at just 12 per cent of GDP (albeit growing to 16 per cent in 2016, according to S&P), which reflects its tradition of fiscal restraint over the past decade and a half – the deficit should come in at 2 per cent of GDP this year. Bulgaria’s currency board arrangement effectively hard-pegs the country’s lev to the euro, meaning that it has avoided the volatility experienced by neighbours Serbia and Romania.
“The downgrade reflects the slow economic recovery rather than anything related to political situation or any change of budget policy,” Tsvetoslav Tsachev, Head of Research at Sofia financial services company ELANA Trading, told beyondbrics. “Bulgaria is still viewed as a country with macroeconomic stability. We do not expect to have any impact on investors or on the markets.”