Moody's expects Bulgaria's GDP to grow 1.2% in 2013 on the back of higher exports, the finance ministry reported, citing the agency's annual credit report on Bulgaria. This projection is slightly higher than the recently revised forecast of the Bulgarian government for 1% economic growth in 2013.

The country's budget deficit-to-GDP ratio is seen rising to around 1.4% in 2013 from 0.8% in 2012 due to increased social spending, an anaemic expansion in industrial output, high unemployment rate and subdued domestic demand.

We remind that the Bulgarian government plans to revise this year's budget on the back of worsened economic outlook. The deficit target level of 1.3% of the full-year GDP set in the 2013 budget law will likely be raised due to reduction in the revenue forecast and higher  social expenditure planned. It will however remain below the 3% ceiling, the finance minister confirmed.

The budget deficit will narrow to 1.3% of GDP in 2014 as an acceleration in economic growth is likely to be offset by continued pressure on the government to increase social spending, according to Moody's. The GDP growth for 2014 is seen at 2.4%.

Bulgaria's low indebtedness (relative to its euro area peers) is the major reason behind the high assessment of the government's financial strength, Moody's noted. The agency assesses the country's fiscal and monetary policies as prudent and banking supervision as effective.

The agency said that the developments in the labour market (declining staff numbers and rising wage levels) will continue to hinder the private demand recovery.

Moody's assesses Bulgaria's political risk as low but calls attention to the high public discontent, which could lead to the implementation of populist policies and another snap elections. However, the agency notes that the country's major parties agree on the significance of fiscal stability, low levels of government debt and the currency board.