24.07.2009

JCR has affirmed its BBB rating on the foreign currency long-term senior debts and its BBB+ rating on the local currency long-term senior debts of the Republic of Bulgaria. The outlook of the ratings has been kept negative.

The ratings are based on Bulgaria's solid fiscal structure underpinned by a continued fiscal surplus and the substantial reduction of the government debt, its maintenance of the solid currency board arrangement through collaboration between the government and the BNB, and its expanding production capacity rendered by robust investments amid massive inflows of foreign direct investment (FDI) and EU subsidies.

On the other hand, the ratings remain constrained by the country's large current account deficit despite its rapid improvement in the recent months, a sizable foreign debt in the private sector and the fact that its industrial transformation still remains at a primary stage.

The outlook of the ratings remains negative as the external finance of country's sizable foreign debts in the private sector remains vulnerable to the ongoing global economic and financial turmoil. The Bulgarian financial remains stable due to a spate of measures adopted by the BNB such as a reduction of the minimum reserve ratio and bank deposit guarantees and moderation of the turmoil, JCR notes. Notwithstanding, the external finance of country's sizable foreign debts in the private sector still has vulnerability. The foreign debts accumulated in the process of the country's rapid economic expansion since 2004 swelled to 108% of GDP at the end of 2008 from 64% at the end of 2004. Of the total, private-sector debts (including inter-company loans) accounted for 89% and short-term debts for 36% at the end 2008. While the current account deficit started improving on a sharp fall in domestic demand in the four months of 2009, net capital inflows (FDI, portfolio investment and other investments) into Bulgaria have dropped due to a reduction of lending to the private sector.

JCR determines Bulgaria's fiscal position solid enough to meet worse fiscal balance and contingencies. This is due to the tight fiscal policy pursued since 2004 and as a result, the fiscal balance has been in surplus for five consecutive years. The general government debt has been substantially reduced to 14% of GDP at the end of 2008 from 37.9% in 2004. At the moment the rating agency forecasts a deterioration of the fiscal balance in 2009 and 2010 due mainly to revenue shortfalls stemming from a severe economic downturn. Nonetheless, with fiscal reserves standing at a level equivalent to more than 12% of GDP at the end of May 2009, the government has sufficient capacity to meet contingencies including systemic risks. The country's financial system remains stable thanks to the stringent supervision conducted so far by BNB, with its stress test showing that it has enough capitalization to absorb any deterioration in the quality of assets held by banks. JCR projects that the economy is likely to contract by more than 5% in 2009 on continued restraints on bank lending to the private sector and the recession in major trading partners in Europe. In the medium term, however, the Bulgarian economy will retain its strong growth potential, underpinned by massive inflows of FDI and EU subsidies.