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Moody's Investor Service (Moody's) hasaffirmed Bulgaria's Baa2 rating, with the outlook remaining stable. The decision takes account of the balance between the resilient economic development and the favourable fiscal stance, on the one hand, and the structural challenges with regard to the demographic developments, on the other hand.

The first driver for the affirmation of Bulgaria's rating relates to the country's resilient economy and robust medium term growth prospects, supported by predictable macroeconomic policies. The growth of the Bulgarian economy accelerated to 3.6% and 3.4% in 2015 and 2016, respectively, mostly as regards private consumption and net exports. Looking ahead, Moody's expects that the country's growth performance will continue to benefit from the improved labour market conditions. Domestic demand will be additionally strengthened by credit expansion and by the positive contribution of investments to growth owing to greater absorption of EU funds. Moody's forecasts real GDP growth of 2.9% in 2017 and 2018.

The second driver, according to Moody's, is the good balance sheet with low and declining debt levels and sizeable fiscal reserves. The experts also note the over-performance of the budgetary target in 2016, i.e. a fiscal surplus of 1.6% of GDP on a cash basis and a balanced budget on an accrual basis, resulting from a higher-than-expected growth and revenue collection and under-execution of capital expenditures. In 2017, Moody's expects a fiscal deficit of 0.6% of GDP. Moody's projects the fiscal deficit to remain narrow, comfortably reaching the authorities' target of fiscal balance by 2020.

Moody's also projects a decline in Bulgaria's general government debt-to-GDP ratio to 23% of GDP by 2020, from a peak of 29.5% of GDP in 2016. The analysis also shows that Bulgaria's debt ratio is significantly below the median debt ratio for Baa2 rated peers.

The third driver for the affirmed rating, according to Moody's, are the structural labour market challenges, including demographic developments and labour force characteristics, which could have an adverse impact on the long-term economic growth.

According to Moody's, an upward rating pressure would be likely should fiscal consolidation resume at a significantly faster pace bringing government debt levels closer to pre-crisis levels, as well as the passage and implementation of structural reforms that would raise potential output levels. A downgrade could be triggered in case of renewed political volatility and deviation from the stable macroeconomic policies, and, although unlikely given regulatory reforms, renewed stress in the banking system or signs of a reversal in the government's commitment to policies aimed at containing budget deficits and the public debt stock.

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