Credit ratings agency Moody's affirmed on March 20 Bulgaria's Baa3 local and foreign currency ratings, with a stable outlook, but said that Bulgaria's economy faced tough times this year.

"Bulgaria is likely to experience a difficult recession in 2009 as the economy suffers from shrinking exports and slowing inflows of foreign capital," Moody's sovereign risk group analyst Kenneth Orchard said in a statement. "Nevertheless, many years of prudent fiscal policy and low debt mean that the government is well positioned to cope with the situation."

Having averaged Budget surpluses of 2.7 per cent of gross domestic product (GDP) since 2004, the Cabinet has strengthened its financial position, but the main threat did not come from the Government debt, which was a very low 14 per cent of GDP.

"Many years of strong domestic demand growth have left the Bulgarian economy with heightened vulnerabilities. Domestic credit, external debt and the current account deficit all increased at rapid rates from 2005 to 2008," the ratings agency said.

Although the banking sector was in good shape, with relatively high capital adequacy and liquidity ratios by international standards, it would not take long for the situation to worsen as the global crisis takes deeper roots in Eastern Europe.

"The decline in foreign financing will probably cause a sharp downward adjustment in the current account deficit, implying declining output and weak government revenue growth," Orchard said. "However, Moody's believes that low wages and a flexible labour market will ease the adjustment and ultimately allow Bulgaria to rebound when the regional economy improves."

Bulgaria's most pressing problem was the large debt accumulated by the private sector. "Moody's believes that a greater risk comes from the large amount of private sector external debt that must be re-financed in 2009," Orchard said.

"Short-term external debt totalled around 13 billion euro at the end of 2008, which is equivalent to 40 per cent of GDP. Much of this debt is likely to be rolled over, but automatic re-financing can no longer be assumed in the current financial environment."

The low Government debt was a safety net, because it allowed Bulgaria to borrow funds to support the private sector and the currency board without threatening the government's creditworthiness. The debt-to-GDP ratio could rise and still remain well below the EU average, Moody's said.