By Georgi Angelov*

On July 22, 2011 Moody's upgraded the credit rating of Bulgaria from Baa3 to Baa2 with stable outlook. This development was to a great extend expected (though not guaranteed) after Moody's report from May earlier this year. This is the first increase of the credit rating of Bulgaria in the last 5 years and the level achieved is now the highest since Moody's started grading the country.

The First Step in Setting Itself Apart from the Problematic Countries

The increase of the sovereign rating by Moody's is the first step for Bulgaria in distinguishing itself from the problematic countries in the region. While the rating of Greece was dramatically downgraded during recent months, Bulgaria's rating went into the opposite direction – upgrade. The rating of Romania (an IMF client too) was not increased and now is lower than that of Bulgaria, which is also a step in distinguishing the two countries.

In fact, Bulgaria currently has the highest grade on the Balkan Peninsula, including those of Greece, Romania, Turkey, Serbia, Montenegro, Albania and Bosnia and Herzegovina. What is more, Bulgaria has higher rating than the problematic Eurozone and EU members as Portugal, Greece, Ireland, Latvia and Hungary, which was not the case just a few months ago.

This is the beginning of a process of distinguishing Bulgaria, which – if brought successfully to an end through sound economic policy – may result in increasing the investment trust in the country, despite the problems of the other countries in the region. As Estonia managed to set itself apart from the troubles in the other Baltic countries and achieve fast recovery of investments and economy, Bulgaria has the chance to accomplish such development in the same manner. But these goals demand furthering the efforts in eliminating the budget deficit in a shorter timeframe and a more reformist economic policy.

At Least One Lost Year

Already in the beginning of 2010 Moody's announced that it might upgrade the credit rating of Bulgaria due to its promise to maintain balanced budget policy. However, Moody's did not realize its intention – because of the revision of the 2010 budget and the big increase in the budget deficit of the country.

Unfortunately, in the beginning of 2010 in Bulgaria it became increasing popular to sustain the notion that budget deficits help in dealing with the crisis (Bulgaria's trade unions were especially active in endorsing these wrong beliefs, which were expedient for the government at that moment too).

If the government had not allowed such budget deficit levels in 2010 and had kept its promise for a balanced budget, the recovery of the economy would have begun in 2010 and would have increased at faster rates. The credit rating would have been upgraded already a year ago and the foreign investments would not have been decreasing for so long.

It is impossible to turn back the clock, but now the government can accelerate the budget consolidation and to eliminate the budget deficit already in 2011 or in 2012 at latest. The quick reduction of the budget deficit has a positive impact on investment trust and brings about higher rate of economic growth, employment and incomes. It is no coincidence that Sweden and Estonia have record high economic growth rates – these are the countries, which were the first to eliminate their budget deficits as early as 2010.

The Rating is Not High Enough Yet

Despite the increase of its rating by Moody's and although Bulgaria has the highest rating on the Balkans, this does not suffice at all. It is not enough to compare the country with the other countries in the region – Bulgaria needs to reach the level of the leading new member states and even to pursue the levels of the leading countries in Europe.

Bulgaria's credit rating is 4-6 notches lower than those of the leaders among the new member states (Estonia, the Czech Republic and Slovakia have A1 rating from Moody's and Slovenia even Aa2). The difference between the sovereign ratings of Germany and Bulgaria is much higher – full eight notches. In addition, Moody's did not miss the opportunity to note that the rating can be downgraded if the government allows big budget deficits and substantial rise in the government debt. This means that there is a lot to be done and the current increase of the rating should not be perceived as an end to the process, but rather as a start of the efforts to recover investors' trust in the country.

*The author is a Senior Economist with the Open Society Institute – Sofia

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