ECR correctly predicts S&P’s Hungary upgrade – Bulgaria is surely next
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ECR correctly predicts S&P’s Hungary upgrade – Bulgaria is surely next

The decision to reassign Hungary’s investment grade will bring delight to Budapest, bringing the sovereign borrower correctly in line with Romania, but S&P needs to take note – Euromoney’s country risk survey is shining the spotlight on another country that is closely aligned.

Bulgaria flag huge-R-600

Making themselves known: but still Bulgaria can’t get the attention of S&P

Hungary’s improvement had been regularly charted in Euromoney’s survey.

Risk experts began to feel more confident about the macro-fiscal outlook and the slight shift in policymaking away from the unorthodox tax-raising and big-business bashing that had previously undermined its investor credentials.

However, predictably, the credit rating agencies were slow to take these subtle improvements on board.

Fitch upgraded Hungary in May, and yet it was still several weeks after ECR had recommended the borrower for investment grade. Moody’s, meanwhile, has still not taken the leap, with S&P deciding to do so only on September 16.

ECR had been alerting to a change in 2015: not oncenot twice, but three times.

The tardiness of the rating agencies is a common theme. Euromoney’s survey has regularly shown trends in scores developing months, sometimes years, in advance of the agencies reacting, both in terms of upgrades and downgrades.

Hungary’s score fell sharply after the 2008 financial crisis and 2010 sovereign debt crisis, and in response to negative perceptions of the political scene.

However, the borrower began to show improvement from a low in 2013, climbing back into the third of ECR’s five tiers, to 60th in the global rankings, a level that is deemed worthy of investment grade.

Hungary’s score is broadly equivalent to Romania’s, which already has all three investment grades.

Yet Bulgaria is following a broadly similar trend, and still does not have that elusive S&P investment grade. Surely it can be only a matter of time:


The case for Bulgaria

Bulgaria’s prospects are favourable, largely down to the decision taken years ago to introduce a currency board arrangement, a type of fixed exchange rate with full convertibility fixing the Bulgarian lev to the euro.

“This has been an important prerequisite for the stability of the economy and the reduction of foreign exchange, credit, political and other types of risk,” says Elena Stavrova, associate professor at the Bulgaria-based research institute South-West University.

“The results of rapid changes in the real sector – the privatization, attracting foreign direct investment, and the changes in social and political situation in the country could be identified immediately.”

Recently the economy has been growing at a strong and steady pace.

GDP increased in real terms by 0.7% in April to June (3% year-on-year), matching the previous quarters, and resulting in the IMF recently upgrading its GDP growth estimate for the year to 3%.

The IMF report notes an unemployment rate at its lowest in seven years – having slipped to 7.9% (on an EU harmonized basis) in July – a current-account surplus, an improving fiscal deficit and one of the lowest sovereign debt levels in Europe, presently less than 30% of GDP.

Bulgaria, meanwhile, scores higher than Hungary on all five economic risk factor scores and three political indicators – losing out mainly on corruption and government stability.

Several of Bulgaria’s economic risk factor scores have improved during the past year, and preliminary returns from Euromoney’s third-quarter survey – to be released in a couple of weeks’ time – suggest its ranking is still gradually improving, helped along by a rising capital-access score.

Tzvetomir Tzanov, chief assistant professor in the Department of International Business at the University of National and World Economy in Bulgaria, notes the fact there was a “significant fiscal surplus reported for the first half of this year exceeding BGN3 billion”.

This is equivalent to more than 3% of the 2016 GDP forecast, compared with 1% of GDP for the same period in 2015.

Tzanov goes on to say “the stress test of the local banking system did not indicate any major structural problems. On the contrary, local banks common equity tier 1 ratio is significantly above the minimum regulatory requirements.”

On top of that there is relative political stability at present, with no indications of early parliamentary elections and no changes expected unless a shock occurs at the presidential elections in November.

The justification for a credit rating upgrade is clear. There might be 770 kilometres separating Budapest from Sofia, but in risk terms there is barely a hair’s breadth.

S&P should make the trip.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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