04.05.2011

Bulgaria's Baa3 government ratings reflect the country's healthy government finances and its moderate economic strength. The ratings are currently on review for possible upgrade, in recognition of rapid progress in fiscal consolidation after the global crisis as well as in strengthening public institutions over the last few years, Moody's Investors Service states in its regular report.        

Moody's expects Bulgaria's fiscal deficits to fall below the EU's Maastricht criteria of 3% of GDP already in 2011, thanks to prudent fiscal management and an increasingly robust economic recovery, and then to continue to shrink towards zero in the years ahead. Moody's reminds that Bulgaria has the second-lowest debt in the EU after Estonia. According to the agency, maintaining low deficits and debt are important for longer-term fiscal and monetary stability given pressures being exerted by the ageing population and the fixed exchange rate.

The macroeconomic framework will possibly remain stable thanks to the Government decisions to enshrine fiscal prudence within the constitution. The agreement reached among Government, business and unions on measures to assure the sustainability of the public pension system while also fostering the growth of the private pension system, will also contribute to higher predictability is Moody's opinion.

Institutional capacity was strengthened in the process of EU accession, and Moody's assesses Bulgaria's institutional strength as moderate. Also noted are the contradictory international views on the rule of law and the fight against corruption in the country.

Moody's also says that the sizeable contraction in macroeconomic imbalances that has occurred is not likely to be meaningfully reversed since FDI and other private capital inflows such as between foreign parent banks and their Bulgarian subsidiaries and branches are likely to be permanently lower in the years ahead.

Competitive wages and low tax rates should help maintain private sector investment, while public investment will also be supported by EU structural funds. The government's National Reform Programme sets an ambitious but not unrealistic goal of raising Bulgaria's incomes to 60% of the Eurozone average by 2020, up from 40% now.

Moody's views Bulgaria's susceptibility to event risk as moderate. Although the currency board arrangement is well-established and highly unlikely to be changed, having survived a very tough test during the global crisis, Moody's will probably not lower its assessment of event risk at least until such time as Bulgaria has been cleared to join the European Exchange Rate Mechanism II, bringing euro membership closer.