Moody's raises Bulgaria's credit rating to Baa1

Moody's Investors Service upgraded the Government of Bulgaria's senior unsecured and long-term issuer ratings in foreign and local currency to Baa1 from Baa2 and changed the outlook to stable from positive, the Bulgarian Finance Ministry said on 10 October.

Concurrently, Moody's has also upgraded Bulgaria's senior unsecured MTN programme rating to (P)Baa1 from (P)Baa2. Moody's decision to upgrade Bulgaria's ratings to Baa1 reflects the following key drivers: enhanced institutional capacity and policymaking as the country enters a critical phase of euro area accession; reduced exposure to foreign currency debt risk, large fiscal reserves and expectations that positive fiscal and debt dynamics post pandemic shock will preserve the government's strong balance sheet.

The stable outlook reflects Moody's expectation that fiscal strength indicators will remain resilient even under an adverse scenario, and above the median for Baa1-rated peers. The stable outlook also balances intrinsic strengths in Bulgaria's improving economic and institutional framework with key credit challenges that predominantly relate to the negative impact of adverse demographics on medium-term potential growth, as well as continued challenges in the fight against corruption, judicial independence and the rule of law.

Bulgaria's long-term local currency bond and deposit ceilings have been raised to A1 from A3. The long-term foreign currency bond ceiling was also raised to A1 from A3 and the long-term foreign currency deposit ceiling to Baa1 from Baa2. Finally, the short-term foreign currency bond has been raised to Prime-1 from Prime-2, while the short-term foreign currency deposit ceiling is unaffected by this rating action and remains at Prime-2.

Bulgaria joined the Exchange Rate Mechanism (ERM2) in July after completing commitments in several policy areas, which was proof of "the credibility of Bulgaria's ambition to join the euro area," the credit agency said.

Going forward, Moody's said it expected Bulgaria to continue to pursue "sound economic and financial policies, as entering the euro area will require both sustainable economic convergence and readiness to participate in the banking union."

Despite the negative impact of the COVID-19 pandemic, Bulgaria's fiscal credit profile remained strong after four years of growing structural fiscal surpluses, which resulted in the second-lowest debt-to-GDP ration in the EU, at 20.4%, Moody's said.

The credit ratings agency estimated Bulgaria's economy shrinking by 3.5% this year and bouncing back 2.7% in 2021. Although it forecast government debt to grow to 23.9 per cent of GDP this year and 24.2% of GDP in 2021, debt affordability would remain strong, Moody's said.

The stable outlook balanced Bulgaria's improving economic and institutional framework against the negative impact of adverse demographics, as well as "continued reform needs in the fight against corruption, judicial independence and the rule of law." The stable outlook also assumed that Bulgaria's next government will remain committed to joining the euro area.

Fundamental improvements in the quality of executive institutions and the judiciary, or "a clear and sustained convergence path towards better infrastructure and overall higher living and institutional standards" could lead to an outlook improvement or even credit upgrade, Moody's said. Conversely, a deterioration in those areas could put downward pressure on the rating.

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