The credit rating company Moody's Investors Service expects in its latest report on Bulgaria that the country's economy will contract by 5% in 2009.

"The country's economic strength is suffering a setback in 2009, as the domestic demand-led boom is coming to an end. Real output is set to contract by at least 5%, as a result of a sharp fall in exports on the back of the deep recession in the major European economies and a tightening of credit in the European banking system", Kenneth Orchard, a Vice President-Senior Analyst in Moody's Sovereign Group.

With a small economy, Bulgaria's nominal GDP is forecast at USD 44 B in 2009, well below the Baa-category median and larger regional economies. The economy has shown impressive convergence over the past ten years, however, with real GDP growth averaging 5,3% per annum, even as the population declined.

Bulgaria was raised to investment grade in March 2006 and Moody's affirmed the current ratings (Baa3) in March 2009.

Moody's expects the growth setback to be temporary and for real income convergence to resume eventually, and be more sustainable. Government financial strength is, however, holding up well in the current crisis.

"Past fiscal efforts have paid off. Bulgaria entered the recession with a large budget surplus, and the reduction in government revenue has not led to an enormous budget deficit, as it did for many countries around the world. Despite the deteriorating economic and financial situation, the government's sound initial fiscal position and low debt burden leave it well-placed to cope with the ongoing crisis", Orchard said.

Moody's forecasts a budget deficit of 2,7% of GDP in 2009, which would be among the lowest in the EU. However, this also means that Bulgaria's public debt ratios are expected to increase over the next few years, possibly by a considerable amount (off of a low base) if the economy fails to stabilise in the near term.

Moody's believes the country is moderately susceptible to three event risks: 1. the economic downturn, which the government has managed to control so far, but which is still at an early stage in Bulgaria and could become much worse; 2. problems in the banking sector, particularly in locally owned institutions; 3. financial contagion, initiated by a severe event in another country in the region.

Moody's analysis also factors in the possibility that the government could enter into a standby arrangement with the IMF to secure associated financing from the EU and related institutions.

The issuance of this credit report by Moody's Investors Service is an annual update to the markets and is not a formal action to alter the credit rating of the issuer.

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