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Moody’s Upgrades Bulgaria’s Rating

Date: 28.07.2011

Moody's Investors Service has upgraded Bulgaria's government debt ratings to Baa2 with a stable outlook from Baa3 in a long-anticipated review.

According to a statement on the website of the international credit rating agency signed by Kristin Lindow, Senior Vice President, Sovereign Risk Group, Moody's Investor Service, the improvement reflects Bulgaria's ongoing fiscal discipline and improving institutional strength as well as the financial system's relative resilience in a volatile regional environment. This rating action concludes Moody's review for possible upgrade that was announced on 5 April 2011. Moody's said today's upgrade of Bulgaria's government ratings was motivated by three major factors:

  1. Effective fiscal consolidation supplemented by recent structural reforms, which are expected to maintain Bulgaria's very low debt burden by leading to a further reduction in the general government deficit to below the 3 % Maastricht limit in 2011 and roughly balanced budgets in the years to come.
  2. Strengthened institutional capacity thanks to determined efforts to increase the absorption of EU funds and to reform systems such as the judiciary and the police in order to improve the rule of law.
  3. Strong liquidity and capital buffers of both the financial system and the government, which in Moody's opinion are sufficient to absorb shocks deriving from regional volatility.

In related actions, Moody's also upgraded Bulgaria's country ceiling for foreign currency deposits to Baa2/P-2 from Baa3/P-3, and aligned the country ceiling for local currency deposits to the Baa2 level (down from Baa1) because of Bulgaria's currency board arrangement in which the Bulgarian lev is pegged to the euro. In addition, the country ceiling for foreign currency debt was raised from A1 to Aa3, equivalent to the Aa3 country ceiling for local currency debt.

"We expect the general government financial balance to show a deficit below 3% of GDP in 2011, as evidenced by the results already achieved in the first half of the year," said Moody's. "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. "Progress has also been noted in improving the judicial and legal enforcement systems, although implementation of newly-strengthened procedures still has some way to go, as noted in a recent EU report. Already there has been a marked increase in the absorption of EU structural and cohesion funds, and further coordination of such programs with needed infrastructural expansion is also underway," the agency said. Finally, Moody's noted that Bulgaria's government finances and its banking system are expected to weather the impact of the Greek debt crisis thanks to substantial liquidity and capital buffers.replenished the government's fiscal reserves to a comfortable level, it is well-equipped to handle a more adverse than expected environment.

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