June 29 (SeeNews) - Institutional quality and poor business climate are among Bulgaria's main credit challenges, Moody's said on Friday
"Despite recent reforms, aspects of the country's overall institutional quality, notably the control of corruption and the rule of law, continue to show little improvement, with negative implications for Bulgaria's investment rate," the ratings agency said in a press release, announcing its annual credit analysis report on Bulgaria.
Other major challenges, according to Moody's, include poor condition of the country's physical infrastructure, high youth inactivity and share of long-term unemployment and adverse demographics.
On the upside, Bulgaria is in a strong fiscal position, which reflects its favourable debt-to-GDP ratio compared to EU peers and Baa2 rating peers, as well as the authorities' commitment to gradually consolidating fiscal metrics without impairing economic growth.
The country's debt of 25.4% of GDP in 2017 adds fiscal flexibility and shock absorption capacity, Moody's said. The ratings agency expects Bulgaria's debt-to-GDP ratio to steadily decline to around 23% of GDP by 2019.
GDP growth is projected at 3.6% over the next two years, supported by domestic demand, and with a negative contribution from external demand as import growth picks up.
Moody's also said in the press release:
"Moody's expects a fiscal deficit of 0.4% of GDP in 2018, reflecting an increase in government spending and a slight decrease in the revenue/GDP ratio. The rating agency forecasts a broadly balanced budget (-0.1%) in 2019, but sees risks to spending if the government is unable to improve expenditure efficiency, particularly around social expenditures, which have increased steadily over the past decade.
In the short- to medium-term, the government's debt remains vulnerable to the materialization of contingent liabilities from state-owned entities (SOEs), and the energy sector in particular.
Bulgaria has moderate susceptibility to event risk, primarily driven by the country's banking system challenges. The banking system's main challenge remains the high levels of non-performing loans (NPLs), which exceed the European average. However, the ratio of NPLs to gross loans has been improving driven by the strong economic conditions and the banks' efforts to clean their balance sheets.
Upward rating pressure would be likely should fiscal consolidation resume at a faster pace and bring government debt levels closer to pre-crisis levels without undermining growth. The implementation of structural reforms targeting Bulgaria's structural constraints and raising potential output levels could also be positive.
Downward rating pressure would be triggered in case of renewed political volatility that would interfere with policymaking and undermine the government's commitment to sound policies and reforms. A reversal in the authorities' commitment to containing budget deficits and reducing the public debt-to-GDP ratio would also be negative, as would renewed stress in the banking system."