S&P cuts Bulgaria's rating to junk

By bne IntelliNews December 15, 2014

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Standard & Poor's has cut Bulgaria's long- and short-term foreign and local currency sovereign credit ratings to below investment grade because of the risk of further state support to the financial sector and the deteriorating fiscal position, which are expected to push the country's net public debt to just below 30% of GDP in 2017, from 12% in 2013.

The rating was lowered to BB+/B from BBB-/A-3, with the outlook remaining stable, in an announcement on late on December 12. The stable outlook balances the risks S&P sees from potential vulnerabilities building up in the financial sector against still-low levels of government indebtedness, S&P said in a statement. However, the credit agency could lower the ratings if the domestic financial system requires further government support. Fitch Ratings and Moody’s both rate Bulgaria at investment grade.

In June, Corporate Commercial Bank (Corpbank), Bulgaria's fourth-largest bank at the time, suffered large deposit withdrawals and was placed under central bank receivership. A week later, First Investment Bank (FIBank), the third largest lender in the country, was also hit by a run, prompting the government to provide it with BGN1.2bn (€613mn) in exceptional liquidity financing. Five months later, Corpbank's licence was revoked and the government extended a BGN2bn loan to the underfunded Bulgarian Deposit Insurance Fund (BDIF) to help it pay all of the lender's insured deposit. Taken together, state support to the financial sector has totalled 3.5% of GDP in 2014.

Another cause for concern cited by S&P is the government's widening budget deficit. The ratings agency expects the public finances gap to reach 3.5% of GDP this year, from 1.2% in 2013. Overall, S&P projects that the government will issue the equivalent of 11% of GDP in debt this year, the highest increase in gross debt since Bulgaria established its currency board in 1997.

S&P sees the general government deficit narrowing gradually to 3% of GDP by 2017, which is above the government's target of 2% of GDP because of a divergence in the expected nominal GDP growth. As a result, S&P expects that general government debt will increase by an annual average of 4.3% of GDP in 2014-2017, materially higher than previous projections. 

Meanwhile, the challenges to Bulgaria's banking system and the deterioration of its fiscal position have been exacerbated by a sustained deflation of consumer prices which in October was 1.5% lower than in October 2013. Based on that, and also on the expectation of weaker domestic demand and lower net export growth, S&P lowered its forecast for 2014-2017 average real GDP growth to 1% from just under 2%.

Regarding the political environment, the credit agency believes that policy uncertainty in Bulgaria may persist, given that the new minority government relies on extra-coalition support to pass legislation and is itself composed of several factions. 

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