After a difficult two years that saw five governments, ongoing
street protests and a banking crisis, Bulgaria’s politics and economy
may be getting back to something approaching normality in 2015.
Blessed with greater stability – but with a significant fiscal deficit and loans to repay – the county plans to raise 6.9bn lev (€3.5bn) from bond issues this year. But investors may still be wary of the risks of a slow-growing country with a recent history of instability.
On January 8, Vladislav Goranov, finance minister, said the government planned to raise the cash from foreign investors in two issues, one in the first half of the year and one in the autumn. He implied that the first issue would be sooner rather than later, pointing to market liquidity.
“We expect good results on yields, meaning Bulgaria gets cheap financing,” Goranov said early this month.
The money raised will be used to help bridge a fiscal deficit that the government expects to come in at 3 per cent of GDP this year. It will also finance the rollover of a €1.5bn loan it used to finance last year’s deficit, which was increased by the need to guarantee deposits and recapitalise banks following the collapse of Corporate Commercial Bank (KTB or Corpbank) and a run on another domestic lender.
The loan was syndicated by Citi, HSBC and the Bulgarian units of Société Générale and Unicredit, which will also arrange the first foreign bond issue this year.
The 6.9bn lev bonds will increase Bulgaria’s public debt to 28.4 per cent of GDP this year, Reuters reported, from 18 per cent in 2013.
While this is still one of the lowest levels in the European Union, observers have mixed views on Bulgaria’s creditworthiness. GDP growth is expected to come in at under 1 per cent this year, according to a recent forecast by the European Bank for Reconstruction and Development, though the Economist Intelligence Unit expects a respectable average of 3 per cent between 2015 and 2019.
“Bulgaria’s banking crisis and the chronic political instability which has been plaguing the country of late have taken their toll on the country’s creditworthiness,” says Nicholas Spiro of consultancy Spiro Sovereign Strategy. “Many of Bulgaria’s underlying weaknesses have been exposed over the past several months even though the country’s low level of public indebtedness sets it apart from some of its more fiscally challenged CEE peers. Growth remains lacklustre and the budget deficit has deteriorated significantly over the past year – albeit from a relatively strong position.”
While quantitative easing from the European Central Bank will provide a liquidity boost that somewhat offsets the US Federal Reserve’s monetary tightening, Spiro does not expect this to boost demand for Bulgarian sovereign debt considerably.
“A huge burst of monetary stimulus from one of the world’s leading central banks is inevitably positive for emerging-market assets. But Bulgarian yields were already at exceptionally low levels to start with, offering little carry for investors – not least given the mounting risks in the country and the relatively illiquid nature of the market.”
In December, Fitch affirmed Bulgaria’s foreign and local currency ratings at investment-grade BBB- and BBB, respectively, with a stable outlook. The agency noted the stabilisation of the banking sector and the government’s efforts to reduce its deficit, as well as downside risks from the eurozone and the crisis in Ukraine. However, the same month, Standard & Poor’s cut the country’s sovereign credit rating to junk.
There are grounds for optimism. A snap election last October brought an unwieldy four-party coalition to power, including two groupings that are themselves awkward alliances of smaller parties. But a pro-reform government source told beyondbrics the administration’s progress was a case of “so far, so good”.
“There are no major cracks in the government, and none in sight,” the person said. “Some reforms are already under way in health, justice and education, without any sign of social discontent.”
There were also tentatively positive signs on the chaotic and indebted energy sector, with a “major focus” on improving energy security, while in the banking system, ECB supervision and a move towards the eurozone (the lev is already pegged to the euro in a currency board arrangement) were part of the government’s programme.
Still, there is much work to be done – and all with an economy that is both sluggish and vulnerable.
“The governing coalition, although composed of four rather different parties, has already demonstrated that it can deliver,” says Daniel Smilov, programme director at the Centre for Liberal Strategies, a Sofia think-tank. “Bulgaria’s position on the South Stream project and the start of judicial reforms are positive signs. Thus far, the government has handled the banking situation well – what remains to be done is a thorough investigation of responsibility for the Corpbank collapse. As for the energy sector, concrete actions have not been taken yet, and the government has still not announced a detailed plan for tackling the problems.”
Blessed with greater stability – but with a significant fiscal deficit and loans to repay – the county plans to raise 6.9bn lev (€3.5bn) from bond issues this year. But investors may still be wary of the risks of a slow-growing country with a recent history of instability.
On January 8, Vladislav Goranov, finance minister, said the government planned to raise the cash from foreign investors in two issues, one in the first half of the year and one in the autumn. He implied that the first issue would be sooner rather than later, pointing to market liquidity.
“We expect good results on yields, meaning Bulgaria gets cheap financing,” Goranov said early this month.
The money raised will be used to help bridge a fiscal deficit that the government expects to come in at 3 per cent of GDP this year. It will also finance the rollover of a €1.5bn loan it used to finance last year’s deficit, which was increased by the need to guarantee deposits and recapitalise banks following the collapse of Corporate Commercial Bank (KTB or Corpbank) and a run on another domestic lender.
The loan was syndicated by Citi, HSBC and the Bulgarian units of Société Générale and Unicredit, which will also arrange the first foreign bond issue this year.
The 6.9bn lev bonds will increase Bulgaria’s public debt to 28.4 per cent of GDP this year, Reuters reported, from 18 per cent in 2013.
While this is still one of the lowest levels in the European Union, observers have mixed views on Bulgaria’s creditworthiness. GDP growth is expected to come in at under 1 per cent this year, according to a recent forecast by the European Bank for Reconstruction and Development, though the Economist Intelligence Unit expects a respectable average of 3 per cent between 2015 and 2019.
“Bulgaria’s banking crisis and the chronic political instability which has been plaguing the country of late have taken their toll on the country’s creditworthiness,” says Nicholas Spiro of consultancy Spiro Sovereign Strategy. “Many of Bulgaria’s underlying weaknesses have been exposed over the past several months even though the country’s low level of public indebtedness sets it apart from some of its more fiscally challenged CEE peers. Growth remains lacklustre and the budget deficit has deteriorated significantly over the past year – albeit from a relatively strong position.”
While quantitative easing from the European Central Bank will provide a liquidity boost that somewhat offsets the US Federal Reserve’s monetary tightening, Spiro does not expect this to boost demand for Bulgarian sovereign debt considerably.
“A huge burst of monetary stimulus from one of the world’s leading central banks is inevitably positive for emerging-market assets. But Bulgarian yields were already at exceptionally low levels to start with, offering little carry for investors – not least given the mounting risks in the country and the relatively illiquid nature of the market.”
In December, Fitch affirmed Bulgaria’s foreign and local currency ratings at investment-grade BBB- and BBB, respectively, with a stable outlook. The agency noted the stabilisation of the banking sector and the government’s efforts to reduce its deficit, as well as downside risks from the eurozone and the crisis in Ukraine. However, the same month, Standard & Poor’s cut the country’s sovereign credit rating to junk.
There are grounds for optimism. A snap election last October brought an unwieldy four-party coalition to power, including two groupings that are themselves awkward alliances of smaller parties. But a pro-reform government source told beyondbrics the administration’s progress was a case of “so far, so good”.
“There are no major cracks in the government, and none in sight,” the person said. “Some reforms are already under way in health, justice and education, without any sign of social discontent.”
There were also tentatively positive signs on the chaotic and indebted energy sector, with a “major focus” on improving energy security, while in the banking system, ECB supervision and a move towards the eurozone (the lev is already pegged to the euro in a currency board arrangement) were part of the government’s programme.
Still, there is much work to be done – and all with an economy that is both sluggish and vulnerable.
“The governing coalition, although composed of four rather different parties, has already demonstrated that it can deliver,” says Daniel Smilov, programme director at the Centre for Liberal Strategies, a Sofia think-tank. “Bulgaria’s position on the South Stream project and the start of judicial reforms are positive signs. Thus far, the government has handled the banking situation well – what remains to be done is a thorough investigation of responsibility for the Corpbank collapse. As for the energy sector, concrete actions have not been taken yet, and the government has still not announced a detailed plan for tackling the problems.”
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