Bulgaria has stable outlooks, faces recession and weaknesses

Bulgaria's Baa3 government bond ratings and stable outlooks are supported by its government's firm fiscal position and low debt burden, but constrained by prospects of a difficult recession and the institutional weaknesses its government is struggling to address, according to Moody's Investors Service.
"The country's economic strength is suffering a setback in 2009, as the domestic demand-led boom is coming to an end," said Kenneth Orchard, a senior analyst in Moody's Sovereign Group. "Real output is set to contract by at least 5%, as a result of a sharp fall in exports on the back of the deep recession in the major European economies and a tightening of credit in the European banking system."
With a small economy, Bulgaria's nominal GDP is forecast at USD 44 bln in 2009, well below the Baa-category median and larger regional economies. The economy has shown impressive convergence over the past ten years, however, with real GDP growth averaging 5.3% per annum, even as the population declined. The country was raised to investment grade in March 2006 and Moody's affirmed the current ratings in March 2009.
Moody's expects the growth setback to be temporary and for real income convergence to resume eventually — and be more sustainable. Government financial strength is, however, holding up well in the current crisis.
"Past fiscal efforts have paid off," said Orchard. "Bulgaria entered the recession with a large budget surplus, and the reduction in government revenue has not led to an enormous budget deficit, as it did for many countries around the world. Despite the deteriorating economic and financial situation, the government's sound initial fiscal position and low debt burden leave it well-placed to cope with the ongoing crisis."
Moody's forecasts a budget deficit of 2.7% of GDP in 2009, which would be among the lowest in the EU. However, this also means that Bulgaria's public debt ratios are expected to increase over the next few years — possibly by a considerable amount (off of a low base) if the economy fails to stabilise in the near term.
Moody's believes the country is moderately susceptible to three event risks: (i) the economic downturn, which the government has managed to control so far, but which is still at an early stage and could become much worse; (ii) problems in the banking sector, particularly in locally owned institutions; and (iii) financial contagion, initiated by a severe event in another country in the region.
Moody's analysis also factors in the possibility that the government could enter into a standby arrangement with the IMF to secure associated financing from the EU and related institutions.