Bulgaria - Riding the Wave

By Scott B. MacDonald

Bulgaria has recently been hot on the credit ratings front. At the beginning of 2003, the Balkan country was rated B1/BB. In the late 1990s, Bulgaria struggled and came close to defaulting on its external debt. After several years of structural reform and sacrifice by the Bulgarian population as well as the looming probability of EU membership, Bulgaria is now heading toward an investment grade rating. This was underscored in late May and early June, when Moody’s upgraded the Balkan country from B1 to Ba2, a two-notch increase, and Standard & Poor's raised it from BB to BB+. The key reasons for the upgrades are as follows:

While Bulgaria has made considerable progress since the late 1990s, tough challenges remain, which could constrain the movement to investment grade. Key areas that need improvement are privatization, corporate governance, an inefficient energy sector, and deficiencies in property law and contract enforcement. In addition, the long process of economic reform has been painful and popular discontent has been growing. As an IMF report earlier in the year noted: “…the increased political pressure stemming from still-low standards of living and the declining popularity of the government have exacerbated demands for higher public spending and slowed the momentum on reforms.”

A critical upcoming test for the government will be the sale of the MobilTel, the country’s wireless operator. It was acquired 15 months ago by an Austrian consortium for Euro 850 million. It is expected the valuation will be around Euro 1.5 billion. The Austrian consortium brought in a management team from Vodafone, Libertel, Teleglobe and Ameritech and have made it a stronger company. MobilTel’s main selling point is that Bulgaria is still a growth market in terms of wireless penetration. It is around 28%, compared to 83% in the Czech Republic and 68% in Hungary. While this is not an issue of privatization of a public holding, the sale of a majority share to other major telecom companies represents whether Bulgaria has the ability to keep attracting foreign direct investment.

Bulgaria’s move toward an investment grade rating is ultimately anchored in how the government is to weave a much closer linkage with the West. In this, Bulgaria has had a solid track record. It has been invited to join NATO and the European Union has endorsed the country’s plans for accession in 2007. EU membership means that Bulgaria must continue to reform its economy in terms of competitiveness, openness and corporate governance. Failure to make the grade with the EU will hinder membership. Bulgaria and other Eastern European countries clearly do not wish to be left out. One last link to the West is that Bulgaria has emerged as a close U.S. ally, providing bases for U.S. troops and equipment during the Iraq war. There is a growing possibility that the U.S. could make Bulgaria one of its new bases of operations for missions in the Eurasian landmass.

Bulgaria is gradually climbing toward investment grade. Tough challenges remain, but there is a lot at stake for the country in terms of improving the standard of living, the nation’s industrial and communications infrastructures and the ability of Bulgarian companies to compete. Although we do not expect it to achieve an investment grade rating in 2003, if the reform process continues, we believe that would be a possibility in mid or late 2004.