Moody's may upgrade Bulgaria

Moody's Investors Service said it placed Bulgaria's rating on review for possible upgrade, including the Ba1 and Not Prime foreign currency country ceilings, the Ba1 foreign and local currency government bond ratings and the Ba1 local currency deposit ceiling. The local currency guideline is unchanged at Aa3.

The review for upgrade has been prompted by the significant improvements that Bulgaria has undergone over the past two years to the point that it may become a strong candidate for an investment-grade rating, Moody's said. The country's accession to the European Union in 2007-8 should anchor these improvements and provide impetus for a continuation of reforms.

The government's financial position is much improved, with rapid growth and fiscal surpluses leading to a major reduction in government debt levels. Moreover, the government recently announced a deal to pre-pay a significant proportion of its remaining outstanding debt to the IMF and World Bank this year and in 2006.

Despite these positive developments, Moody's said the current account deficit is forecast to exceed 13% of GDP this year, with credit growth strong and external debt levels high. Although common among countries that are taking part in the EU convergence process, these large imbalances, combined with the existence of a currency board, leave Bulgaria somewhat vulnerable to shocks and rapid changes in investor sentiment.

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