Moody's upgrades Bulgaria rating to Baa2, outlook stable

Moody's upgrades Bulgaria rating to Baa2, outlook stable

Credit ratings agency Moody's said on July 22 that it raised Bulgaria's sovereign rating one notch to Baa2, citing the Government's ongoing fiscal discipline and improving institutional strength, as well as the financial system's relative resilience in a volatile regional environment. The outlook on the rating was stable, the agency said.The move was accompanied by increased country ceiling for local and foreign currency deposits to the same credit rating.Moody's hinted at the upgrade in April, when it put Bulgaria's local and foreign currency ratings on review for a possible upgrade. More recently, in June, Bulgarian Prime Minister Boiko Borissov said that the Cabinet expected the country's credit rating to go up, although he did not specify from which agency.Moody's said that a further upgrade was likely should economic convergence lead to accession to ERM-2, the euro zone's waiting room. Just a day earlier, Finance Minister Simeon Dyankov, speaking to CNN's Richard Quest, said that while Bulgaria still wanted to join the euro zone, it was no longer prepared to do that unconditionally, as the case was when Borissov's Cabinet took office in 2009.Serious deterioration in external liquidity and/or a persistent weakening of fiscal policy that causes government debt to rise significantly would put downward pressure on the government's ratings, Moody's said."We expect the general government financial balance to show a deficit below three per cent of GDP in 2011, as evidenced by the results already achieved in the first half of the year," Moody's statement said. "Moreover, the implementation of the latest pension reforms and the new 'Financial Stability Pact' are likely to help keep the government finances close to balanced over the medium- to long-term."The Financial Stability Pact is the constitutional amendments bill put forth by Dyankov that would set a ceiling on annual Budget deficits (two per cent of GDP) and Budget spending (40 per cent of GDP).On the macroeconomic fundamentals, Moody's said that Bulgaria's economy rebalanced itself in the past few years, eliminating very large current account deficits with a "remarkably shallow" recession compared to those experienced in other currency board countries at similar rating levels."Economic growth has resumed in Bulgaria, thus far mainly thanks to external demand. Both consumption and credit demand are still very weak, with unemployment much higher than before the recession," Moody's said."Although foreign direct investment and other private capital inflows are likely to be permanently lower in the years ahead, substantial new investment projects are being planned that are likely to bring in meaningful capital. Competitive wages and low tax rates should continue to attract private sector investment, while public investment will be at least partially financed by EU funds."Concerning the exposure of Bulgaria's banking system, where all major Greek banking groups own subsidiaries, to the debt crisis in Athens, Moody's said that Bulgaria was expected to weather the crisis because of "substantial liquidity and capital buffers. Having replenished the government's fiscal reserves to a comfortable level, it is well-equipped to handle a more adverse than expected environment." (Source: The Sofia Echo)

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