Fitch Affirms Bulgaria at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed Bulgaria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Bulgaria's senior unsecured foreign and local currency bonds have been affirmed at 'BBB-' and 'BBB', respectively. Bulgaria's ratings are supported by its stronger external finances relative to its 'BBB' range peers. A current account surplus is accompanied by a high level of foreign reserves, which provide stability to its existing currency board regime. However, public debt has been pushed closer to the BBB median following one-off costs to fund Bulgaria's Deposit Insurance Fund, eroding a previous rating strength. In addition, large structural weaknesses in the economy constrain potential for higher trend growth. The economy has performed better than Fitch expected. With average annual growth for the first three quarters of 2015 of 2.7%, Fitch has revised up its real GDP growth forecast for 2015 to 2.5%, up 1.3pp from the June forecast. For 2016 and 2017, Fitch forecasts real GDP to average 2.6%. There are weaknesses in the governance and supervision of Bulgaria's banks, highlighted by the bankruptcy of KTB in 2014. The eventual implementation of a sector-wide Asset Quality Review (AQR) in 2016 will add much delayed clarity over the sector's financial health, and could help restore confidence in the sector. Fitch assumes Bulgaria's main economic partners in the EU will benefit from a gradual economic recovery. The European Central Bank's asset purchase programme should help underpin inflation expectations, and supports the agency’s base case that the eurozone will avoid prolonged deflation. Nevertheless, deflation risks could re-intensify in case of adverse shocks.