Fitch, S&P affirm Bulgaria’s ratings with stable outlooks, warn of policy uncertainty

By bne IntelliNews December 4, 2016

Fitch Ratings and S&P Global Ratings both affirmed their ratings on Bulgaria with stable outlooks on December 2. 

However, both international ratings agencies pointed to policy uncertainty following the resignation of Prime Minister Boyko Borissov’s government in November. Early elections are expected to take place in Bulgaria in spring 2017.

Fitch Ratings affirmed Bulgaria's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-', with stable outlooks. Fitch has also affirmed the issue ratings on the Balkan country's senior unsecured foreign and local currency bonds at 'BBB-'. The agency has affirmed the country ceiling at 'BBB+' and the short-term foreign and local currency IDRs at 'F3'.

Meanwhile, S&P affirmed its 'BB+/B' long- and short-term foreign and local currency sovereign credit ratings on Bulgaria with a stable outlook.

Fitch said that the country’s ratings are supported by its sound public finances and favourable and improving external finances. “However, a pattern of unstable governments cloud policy outlook, potentially holding back effective structural reform, which is needed to boost long-term potential growth and raise GDP per capita levels in line with similar and higher rated peers,” the agency added.

The resignation of Borissov and the government led by the centre-right Citizens for European Development (GERB) party has increased the likelihood of early elections next year if President Rossen Plevneliev fails to persuade political parties to agree on a new government mandate in the coming weeks, Fitch noted. The Balkan country has had five different governments since 2009. The last early elections took place in 2014.

S&P said that the country’s economic recovery has been accelerating so far this year, alongside improvements in the labour market, a particularly strong budgetary performance and a current account surplus. On the other hand, the recent government resignation could thwart these improvements, if the following political uncertainty hampers economic recovery or leads to an overly lax fiscal stance, the agency warned. “Following the government’s resignation in mid-November, Bulgaria is facing uncertainty about the future path of economic policy. We view it as highly likely that early elections will be called for spring 2017 and a caretaker government will come into office until the snap elections,” S&P said.

According to Fitch, the pattern of unstable governments is a weakness for Bulgaria's rating and disrupts effective policy setting. The agency does not envision any significant delay in implementing the 2017 fiscal budget, but also notes that budget revisions by a new government could occur post-election. “Meanwhile, with the draft election code submitted back to parliament for further discussion, after a national referendum on the bill failed to attract sufficient support, it remains unclear whether changes to Bulgaria's electoral system will be in place in the near term”, the statement said.

Fitch has raised its macroeconomic baseline forecast to an average real GDP growth of 2.8% for 2017-2018, up from 2.4% six months ago. The upward revision reflects positive carryover effects from a much stronger 2016 real GDP performance than projected back in June, “where growth is now expected 1.3pp higher at 3.4%, and above the 'BBB' median of 3.1%”. The agency noted that a national accounts revision indicated a much higher contribution from domestic demand relative to net exports than previous estimates. So far this year, resilience in household consumption is offsetting temporary weakness in gross fixed capital formation and low government spending, the statement said.

S&P sees Bulgaria’s real GDP growth at 3.3% in 2016, 3% in 2017 and 2.6% in 2018.

Fitch assessed that fiscal performance has benefited from stronger economic growth and administrative tax measures. According the agency, a favourable budget outperformance is likely in 2016 on the back of higher than planned receipts in tax revenues and contained government spending. The agency now expects a deficit of 0.9% of GDP (ESA 2010) for this year, significantly below the 'BBB' median deficit of 2.7% of GDP.

S&P expects the fiscal deficit in accrual terms to narrow to 0.8% of GDP in 2016 from 1.7% of GDP in 2015. The smaller deficit is seen as supported by measures to widen the tax base and improve collection and especially lower investments as the EU programming period came to an end. In the near term the political situation is the main source of risks for the fiscal consolidation, as the likely electoral campaign may induce a looser fiscal stance in the coming months.

Government debt will climb towards 29% of GDP in 2016 from 26% in 2015, driven by a EUR2bn dual-tranche Eurobond issuance back in March, Fitch said. However, debt will remain below the 'BBB' median ratio of 40.6% of GDP, the agency added.

S&P expects that gross general government debt will remain roughly stable at slightly below 30% over the forecast horizon, reaching 28% of GDP by 2019.

Based on the results of Bulgaria's banking sector-wide asset quality review (AQR) published in August, Fitch views the sector as a lower probability of risk as a contingent liability on the sovereign's balance sheet.

Fitch commented that the stable outlook reflects its assessment that upside and downside risks to the rating are currently balanced. Positive rating action could be triggered by stronger potential GDP growth, sustained improvement in external finances, as well as credible fiscal consolidation that supports stability in the public debt burden. Negative rating action could be triggered by materialisation of contingent liabilities on the sovereign's balance sheet from state-owned enterprises and/or banking sector, as well as higher fiscal deficits resulting in quick deterioration of the public debt trajectory.

S&P commented, “The stable outlook reflects our view that the government’s still-moderate debt burden with ample fiscal space balances the risks of a potential weakening of the external environment, a re-emergence of risks in the financial sector, and the prevalent political uncertainty.”

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