Fitch Reaffirms Bulgaria's Credit Rating at BBB- with Stable Outlook
Fitch Ratings on Friday affirmed Bulgaria's long-term foreign and local currency Issuer Default Ratings (IDR) at BBB- and BBB, respectively.
Outlook for both ratings are stable, Fitch said in a statement. GDP growth is projected at 1.2% for 2015 and 1.5% for 2016 respectively, "below potential growth, which is estimated to be between 1.5%-2.0%).
Lower levels of domestic and external indebtedness relative to the sovereign's "BBB" range peers is what partly supports the ratings, alongside a sufficient level of foreign reserves providing stability for the currency board regime. Both factors make up for "large structural weaknesses" constraining higher trend growth, the ratings agency believes.
The currency board mechanism pegs the lev (the Bulgarian currency) to the euro at a fixed exchange rate and ties the level of levs in circulation to the level of foreign exchange reserves.
"Fitch assumes that Bulgaria's currency board arrangement will remain in place and that governments will continue to pursue policies consistent with it."
Some warnings have been issued as well, with a widening of the headline fiscal deficit to 2.8% of GDP in 2014 from 0.9% in 2013 increasing pressure on the government to rein in public finances in line with EU rules.
"For 2015, our latest projection is for a fiscal deficit close to 3.0% of GDP," Fitch says.
Debt-to-GDP ratio will not peak until 2022-2023, when it will move close to 35% of GDP, according to the agency's projections. "Lack of commitment to fiscal consolidation" and "potentially further support for the banking sector" are described as the biggest risks to Bulgaria's debt levels.
The 2014 "negative developments" in Bulgaria's banking sector are also pointed to as a sign of problems in "corporate governance and supervision in domestically-owned banks." Fitch is referring to the bank runs on now collapsed Corporate Commercial Bank (KTB) and days later the First Investment Bank (FIBank) which caused what many experts call a "banking mini crisis" - though Fitch also underlines the events were "not systemic in nature".
Risks might stem from the situation in neighboring Greece as well due to "increased liquidity and solvency pressures in the Greek banking sector".
Growth in 2015-2016 will be driven by "positive contributions... from both domestic demand and net exports," but domestic demand will be lower in 2015 than the previous year.
"Structural bottlenecks" are what constrains Bulgaria's ratings and stronger growth rates.
Fitch bases some of its assumptions on external developments such as the lack of material escalation between Russia and Ukraine ("that would lead to a significant external shock to Bulgaria's economy"), lack of prolonged deflation in the Eurozone and Greece remaining in the single currency area.
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