Bulgaria’s credit rating upgraded; euro entry likely

SOFIA/LONDON (Reuters) – Standard & Poor’s raised Bulgaria’s foreign currency sovereign credit rating one notch to BBB+ from BBB yesterday, citing a decline in public debt, robust growth prospects, and impending European Union entry. S&P said the outlook on the foreign sovereign credit rating was stable for Bulgaria, which is due to join the EU on January 1, and affirmed its local currency sovereign credit rating of BBB+. «Membership in the EU will underpin further economic and institutional modernization and pave the way for eurozone membership, which is likely by 2011,» the statement said. Analysts welcomed the ratings decision but said Bulgaria had yet to draw level with other Eastern European states that joined the EU when it expanded in 2004. «This is very positive news, though expected,» said Stanislav Gelfer, an analyst with Credit Suisse. «Still, the rating is below the single A level which was assigned to the new EU member states when they acceded in 2004. We think the momentum for Bulgaria’s credit rating is likely to continue, given its prudent fiscal policy.» Bulgaria is due to join the EU with neighboring Romania. Earlier this month Moody’s Investors Service became the last major rating agency to raise Romania to investment grade. Standard & Poor’s lifted Bulgaria to investment grade in June, 2004. Since then, economic growth there has been around 5 percent and is expected to exceed 6 percent in 2006. With state spending restrained by an IMF-designed currency board pinning its lev to the euro, the country has also continued to rack up large fiscal surpluses and cut debt to around 19 percent of GDP at the end of July, from above 64 percent in 2001. Sofia is targeting a surplus of over 3 percent of GDP this year and, despite a budget draft officially aiming for a 0.8 percent surplus in 2007, its finance minister has pledged to keep policy roughly unchanged next year. S&P said continued fiscal prudence, structural reforms and improvements in inflation and the large current account deficit – expected to hit 15 percent of GDP this year – would support further rating improvements. It added that it had brought its foreign and local currency sovereign ratings for Bulgaria in line with each other to reflect its opinion that the country is on track for EMU membership, thereby reducing negative exchange rate pressures. «Meeting the Maastricht criterion on inflation will be the main hurdle for Bulgaria,» Remy Salters, sovereign credit analyst at S&P said in a statement. Bulgaria aims to join the ERM-2 waiting room to euro adoption shortly after joining the bloc next year and expects to be ready to swap leva for the single currency in early 2009. But because eurozone members actually make the switch at on January 1, officials expect to be allowed adopt the euro only in 2010 at the earliest. «The fact that S&P is confident to move now is a reflection to a certain extent that they see 2010 euro adoption as a credible target,» said ING Bank analyst Agata Urbanska.