Dagong Upgrades the Sovereign Credit Ratings of Bulgaria at BBB with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
Sep 18th, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to upgrade both the local and foreign currency sovereign credit ratings of the Republic of Bulgaria (“Bulgaria”) from BBB- to BBB, each with a stable outlook. The stable debt environment, growing domestic demand stimulating economic growth, primary fiscal surplus, and lower financing costs in Bulgaria all improve government solvency both in local and foreign currency.
The main reasons for raising Bulgaria's sovereign credit rating are explained below:
Firstly, the political environment is stable with a consistency of policy. In May 2017, Boiko Borisov, the civic party's chairman, came to charge again, guaranteeing the stability and consistency of policy in Bulgaria. In the short term, the new government will further advance structural reform to improve the country‘s business environment and enhance the national scientific research ability, thus boosting industry development. In addition, the government will crack down on corruption and push forward a reform of the tax system in order to achieve sustainable economic growth.
Secondly, the banking system is steadily improving in Bulgaria. In 2016, the Bulgarian banking system delivered a satisfactory performance in capital adequacy, profitability and liquidity. Although the non-performing loan ratio has improved, it has stayed at a high level of 13.2%. In the short term, the continuous economic growth in Bulgaria and the regulatory reform implemented by the central bank is expected to improve the banking asset quality.
Thirdly, domestic demand leads to a sustained economic growth in the short term, while it is difficult to maintain this growth in the medium and long term due to economic structure. Affected by the presidential and parliamentary elections, a slowdown in investment growth has resulted in Bulgaria's economic growth stalling at 3.4% in 2016. In the short term, robust domestic consumption demand has led a faster expansion in imports over exports. Due to the fact that net export has fallen and that continuous fiscal consolidation will restrain investment growth, economic growth in Bulgaria is expected to fall to 3.0% and 2.9% respectively, in 2017 and 2018. In the long term, since heavy dependence on the external environment and structural problems in the labor force will restrain the economic growth, Bulgaria’s average economic growth is expected to hover around 2.8% between 2019 and 2021 despite its low tax and low labor costs.
Fourthly, fiscal consolidation has caused fiscal deficit to narrow in the short term, thus providing stable resources of repayment. The continuous implementation of the country‘s fiscal consolidation policy and a low absorption rate of EU funds has lead to a decline in government capital expenditure, which has helped the government attain a primary fiscal surplus of 1.9% in 2016. In the short term, as Bulgaria absorbs more EU funds and government capital expenditure goes up, the country‘s primary fiscal surplus will turn into deficit. However, continuous fiscal consolidation causes this deficit to steadily narrow and the general government is expected to run a deficit of 0.8% and 0.6% in 2017 and 2018. At the same time, financing demand to GDP is 1.8% and 2.0%, respectively. Reduced pressure, effective channels of financing, and low financing costs result in stable resources of debt repayment.
Lastly, government solvency in local and foreign currency are improving. Although fiscal deficit drives up government debt, debt growth undergoes a slower pace. It is expected that the country‘s debt-to-GDP ratio will rise to 29.7% and 30.7% in 2017 and 2018 respectively, although this ratio will enter into a downward channel in 2020. The government debt burden is low and general government long-term debt to gross debt remains at 80%, thus resulting in the reduced pressure of short-term debt payment. Under the influence of strong domestic demand, rising oil prices, and sanctions imposed by USA and EU against Russia with Russia’s corresponding anti-sanction measures, it is expected that Bulgaria’s current account surplus will narrow slightly in short term. However, international reserves have reached up to 46.5% of GDP, which can strongly shore up its solvency in foreign currency.
In the short term, Bulgaria‘s domestic political stability, domestic demand stimulating continuous moderate economic growth, a loose monetary policy environment, effective financing channels, and lower financing costs, coupled with the country‘s certain scale of financial assets, a reasonable debt structure, and abundant international reserves, all serve to guarantee government solvency. Therefore, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of Bulgaria for the next one to two years.