Financial Planning and Rating. A Case Study of the country Bulgaria

Étude de cas , 2019 , 32 Pages , Note: 2,0

Economie politique - Finances

The case study is mainly divided into two parts: The first part is conducting a country rating based on the scheme of the rating company Moody's. It uses financial data to evaluate the creditworthiness of the state Bulgaria. The second part is analyzing the specific circumstances of the copper industry and describe relevant
influencing factors. These are used to forecast, based on statistical modeling, the future development of the
Bulgarian copper industry.

Contents

List of Figures

List of Tables

1 Introduction

2 Bulgaria and its economy

3 Moody’s rating for the country Bulgaria
3.1 Economic Resiliency
3.2 Government Financial Strength
3.3 Governement Bond Rating Range

4 Business Planning & Modelling
4.1 Risks in producing Copper in Bulgaria
4.2 Forecast for Copper Production’s essential influencing factors

5 Results

References

List of Figures

Figure 1- Overall Grid Indicated Outcome

Figure 2-Category Range

Figure 3- Sub-Rating Economic Resiliency of Bulgaria

Figure 4- Bulgaria's Governmental Financial Strength

Figure 5- Bulgaria's final rating

Figure 6- Historic Data Copper Price Worldwide

Figure 7- Auto Correlation Price Worldwide

Figure 8- Pegels Classification

Figure 9- Forecast Worldwide Copper Price per Pound in USD

Figure 10- Historic Data Aluminium Price Worldwide

Figure 11- Auto Correlation Aluminium Price Worldwide

Figure 12- Pegels Classification

Figure 13- Forecast – Worldwide Aluminium Price per Tonne

Figure 14- Historic Data Minimum Wages Bulgaria

Figure 15- Auto Correlation Minimum Wages

Figure 16- Forecast Minimum Wages 2020 – 2024 Bulgaria

List of Tables

Table 1- Evaluation of Bulgaria's Growth Dynamics

Table 2- The Scale of Bulgaria's Economy

Table 3- Bulgaria's National Income

Table 4- Pre-Adjustmemt Rating Economic Strength of Bulgaria

Table 5- Overall Economic Strength Evaluation

Table 6- Bulgaria's institutional framework and its effectiveness

Table 7- Bulgaria's Policy Credibility and Effectiveness

Table 8- Pre-adjustment Rating Institutional Strength

Table 9- Overall Institutional Strength Evaluation

Table 10- Bulgaria's Debt Burden Evaluation

Table 11- Bulgaria's Debt Affordability

Table 12- Bulgaria's Fiscal Strength

Table 13- Bulgaria's Political Risk

Table 14- Bulgaria's Liquidity Risk

Table 15- Banking Sector Risk

Table 16- Bulgaria's External Vulnerability Risk

Table 17- Overall Rating Susceptibility of Event Risk

1 Introduction

The term paper aims to conduct a sovereign rating of Bulgaria. Ratings are used to provide information to potential and existing investors about how likely a borrower is to repay its debts (cf. Moore 2016.). Ratings decrease information asymmetries and ensure a sufficient allocation of capital. Trustworthiness is the currency of a sovereign rating. The trustworthi- ness of the state Bulgaria is verified in this paper by following the rating methodology of the rating agent Moody’s. After presenting the current country profile of Bulgaria, creditworthi- ness factors like economic strength, institutional strength, fiscal strength and the suscepti- bility to event risk get evaluated in the chapters 3.1 to 3.4. This evaluation leads to a final rating of the sovereignty of Bulgaria.

Next, one of the most important export-oriented industries of Bulgaria will be analyzed: The copper industry. This industry is responsible for 9% of the overall exports of Bulgaria, which emphasizes the importance of this industry for the Bulgarian economy (cf. OEC 2019.). At first, the industry is presented by describing the overall facts of the industry sector. From this point on, the risks of doing business within or with Bulgaria are evaluated and at the same time implications of sovereign ratings for the industry are discussed. Finally, most important indicators like the worldwide copper price, the worldwide aluminium price and minimum wages in Bulgaria are analyzed and forecasted based on statistical methodolo- gies. This provides insights to future developments in the environment of the industry and possible implications for the industry itself.

The derived insights from conducting a sovereign rating for Bulgaria and to assess the risks and forecasts for the Bulgarian copper industry gets summarized in final result.

2 Bulgaria and its economy

The state Bulgaria is located in the southeast of Europe next to the black sea. It is directly bordered by the Turkey and Romania. 7,15 million people live in Bulgaria and the capital city is Sofia (cf. Auswärtiges Amt 2018.). Bulgaria’s main natural resources are: copper, lead, zinc and farmland (cf. CIA 2019.).

Bulgaria has its own currency named Lew, but it is continuously trying to enter the Euro zone (cf. Berschens 2018.). The political system is aligned to a republic with parliamentary form of government, which is currently lead by the president Rumen Radev (cf. Auswärtiges Amt 2018.).

After the second world war, Bulgaria’s political system transformed to communism. The economy and industry sectors were nationalisd and centralized (cf. BBC 2018.). It was also an ally of the USSR. In 1989, the progress of democratizing the state system started, which lead to a significant privatization programme in 1993 (cf. BBC 2018.). The next political milestone for the development of Bulgaria was the entrance in the EU in 2007. This resulted in a further positive development of the country towards the western ideology of freedom and democracy (cf. BBC 2018.). It can be summarized that Bulgaria had to conduct a mas- sive political, economical and social transformation to a market-based and privat economy anchored in the EU.

Bulgaria’s main industries are the industry sector (e.g. steel production and machine tools); mining sector (e.g. zinc and copper); agriculture sector (e.g. cereals) and the tourism sector (cf. Worldatlas 2019.). Bulgaria’s economy can be classified as strongly based on second- ary sectors.

Today, Bulgaria’s economy is characterized by a strong and stable economy growth of 3,1% in 2018 (cf. World Bank 2019.). In 2018, the inflation rate was at 2,8% caused by higher energy prices, robust domestic demand and higher unprocessed food prices (cf. World Bank 2019.). Bulgaria’s economy is also characterized by high unemployment and poverty rates and it is also the country in the EU with the most unequal distribution of income (cf. World Bank 2019.).

Bulgaria’s economy is fundamentally positive, but has to face multiple future challenges like weaker growth momentum of main trading partners (e.g. EU) and tighter conditions at the financial markets (cf. World Bank 2019.).

3 Moody’s rating for the country Bulgaria

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Figure 1- Overall Grid Indicated Outcome (cf. Moody's 2016: 4.)

The economic resiliency is evaluated by determining multiple Key Performance Indicators (KPIs) in the categories “economic strength” and “institutional strength” (cf. Moody’s 2016: 4.). A rating for the first dimension is used for the second dimension of government financial strength. Therefore, the category “fiscal strength” is added up to economic resiliency and the result is another sub rating. By combining “susceptibility to event risk” and government financial strength, a final rating can be derived from an alpha numeric matrix (cf. Moody’s 2016: 6.).

To derive the required sub-ratings, each KPI is evaluated by using the following category range:

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Figure 2-Category Range (Moody's 2016: 4.).

Adjustments of the numeric scores have to be conducted to plausbilize quantitative perfor- mances. Adjustments can result in additional up- or downgradings of the derived score and this score is used to derive the consecutive rating of the dimension, resulting in an evalua- tion of the Bulgaria’s creditworthiness (cf. Moody’s 2016: 4.).

3.1 Economic Resiliency

The first rating dimension “economic resiliency”, with a significant impact on default proba- bilities, is evaluated with the help of two sub-categories: Economic strength and institutional strength (cf. Moody’s 2016, 5.).

(1) Economic Strength

The first sub-factor of economic strength is “growth dynamics”. Growth dynamics are eval- uated, because growth prospects help to sustain debt burdens and external shocks (cf. Moody’s 2016: 10.). Bulgaria shows an average GDP growth of 3,10% and a volatility of 2,2% (cf. Statista 2019a; World Bank 2019a.). The growth rate is rated with H+ and the volatility with M+. Bulgarias competitiveness is evaluated with 4,46 which leads to a Moody’s rating for this KPI of H+ (cf. World Economic Forum 2017, ix.).

Therefore, by taking the single weights of the KPIs into account, the final rating of growth dynamics for Bulgaria is H.

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Table 1- Evaluation of Bulgaria's Growth Dynamics.

The second sub-factor is the scale of economy, which is measured by the nominal GDP of Bulgaria. Historically, more diversified economies have a higher capacity to generate the required revenues to meet obligations (cf. Moody’s 2016: 10.). Bulgaria reached a GDP of 65 , 13 Billion USD in 2018 (2020: 71,75 Billion USD) (cf. Statista 2019b.). This leads to the rating L- for the scale of economy.

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Table 2- The Scale of Bulgaria's Economy.

To continue the evaluation of Bulgaria’s economic strength, the national income of Bulgaria is required. This sub-category is measured by the GDP per capita. A relative high income per citizen indicates a lower risk of default.(cf. Moody’s 2016: 10.). Bulgaria’s GDP per capita is 19320,76 USD, which has to be rated with H- (cf. Trading Economics 2019.).

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Table 3- Bulgaria's National Income

The three sub-factors can now be summarized in one pre-adjustment rating score:

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Table 4- Pre-Adjustmemt Rating Economic Strength of Bulgaria.

Bulgaria should be evaluated with the rating M+. This rating has to be plausibilized by taking adjustments into consideration. The first one is a potential credit boom in the country. This discusses whether the growth is mainly based on an excessive credit extension. It is meas- ured by the relation of credit growth to GDP growth and the domestic credit per GDP (cf. Moody’s 2016: 10-11.).

An excessive credit growth is reached if the relation is higher than two (cf. Moody’s 2016: 11.). Bulgaria’s credit / GDP relation will be above two in the next three years and is already above two in 2018 (cf. European Commission 2019: 12; International Monetary Fund 2019: 22.). The domestic credit per GDP shows a decrease until 2018 and a slight increase in 2019 (cf. World Bank 2019b.). An additional factor is the unusual wealth distribution within Bulgaria. Bulgaria is in the at-risk-poverty-rate as well as in the income equality above the 28 EU countries’ average (cf. European Commission 2019a, 2;8.). The overall impression lead to the need of a moderate correction of the sub-rating. The economic strength is down- graded by t wo notches from M+ to M-.

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Table 5- Overall Economic Strength Evaluation.

(2) Institutional Strength

Institutional strength is firstly measured by evaluating the institutional framework and its effectiveness (cf. Moody’s 2016: 14.). Bulgaria reaches a score of 0,26 in the Worldwide Government Effectiveness Index, which is an H- rating. It indicates that Bulgaria has a suf- ficient quality of government bureaucracy and administration (cf. World Bank 2019c.). Bul- garia’s rating for the second KPI is H+ due to the fact that Bulgaria reached a Worldwide Rule of Law Index score of 0,54 (cf. World Justice Project 2019.). The last KPI, measuring the control of corruption, is valued with M+ because Bulgaria reached a score of -0,16 in the Worldwide Control of Corruption Index (cf. Global Economy 2019.). Bulgaria achieves a H- rating in this sub-category.

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Table 6- Bulgaria's institutional framework and its effectiveness.

The second sub-category is the Policy Credibility and Effectiveness. It measures the central bank’s credibility and scope for action (cf. Moody’s 2016, 15.). The first indicator for a cred- ible central bank is the average inflation level. Bulgaria’s inflation is averagely 1,14% which corresponds to a rating of VH- (cf. Statista 2019c.). The volatility of Bulgaria’s inflation is 1,82% over the last nine years (cf. Statista 2019d.). In the Moody’s scheme, this fits to the rating of H+.

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Table 7- Bulgaria's Policy Credibility and Effectiveness.

This evaluations lead to the pre-adjustment score of H.

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Table 8- Pre-adjustment Rating Institutional Strength.

The rating has to be slightly corrected due to the adjusting fact that the Bulgarian currency Lew is pegged to the Euro (cf. ECB 2019.). For Moody’s, a pegged currency is a reason to downgrade a rating, because the inflation level and volatility is not directly performed by the national central bank. This is the reason why the rating for the subcategory has to be ad- justed by two downgrading notches. The final rating for institutional strength is M+.

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Table 9- Overall Institutional Strength Evaluation.

(3) Combination of Economical and Institutional Strength

The final rating for the first dimension economic resiliency is the combination of the eco- nomical (M-) and institutional strength (M +) in one shared matrix. The rating for Bulgaria’s resiliency is therefore M.

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Figure 3- Sub-Rating Economic Resiliency of Bulgaria (Moody's 2016: 5.).

3.2 Government Financial Strength

The second rating dimension “government financial strength” is derived by using the deter- mined rating of economic resiliency and combining it with the overall health of government finances. This is called the “fiscal strength” of Bulgaria (cf. Moody’s 2016: 17.).

(1) Fiscal Strength

A high debt burden is the main reason why sovereign defaults occur (cf. Moody’s 2016: 17.). The historical defaults were mainly characterized by a high dependency on external creditors, a significant build-up of debt and a lack of affordability (cf. Moody’s 2016: 17.).

A sufficient first indicator for the debt burden is the “General Government Debt / GDP”- ratio. For Bulgaria, the ratio is 22,10% which equals a Moody’s rating of VH+ (cf. Trading Eco- nomics 2019a.). To get a complete impression, it is also advisable to evaluate the “General Government Debt / Revenue”-ratio. It reflects Bulgaria’s ability to repay the current debt base (cf. Moody’s 2016: 19.). Bulgaria’s performance in this indicator is classified as VH+. Bulgaria’s ratio is 64,01% (cf. ECB 2019a.). This leads to an overall positive impression of Bulgaria’s debt burden.

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Table 10- Bulgaria's Debt Burden Evaluation.

The second sub-category of fiscal strength is the evaluation of the debt affordability. It con- cretizes the impression that Bulgaria is able to trustworthily repay its financial obligations. The KPI “General Government Interest Payments / Revenue” indicates whether Bulgaria is able to bear the financing costs and it reflects the willingness of Bulgaria’s creditors to fi- nance governmental deficits (cf. Moody’s 2016: 19.). Bulgaria has a very low interest pay- ment to revenue ratio of 2,34% which leads to the sub rating VH+ (cf. World Bank 2019d.). It is also supported by the similar strong performance of Bulgaria in the KPI “General Gov- ernment Interest Payment / GDP”- ratio. The governmental interest payments are 0,70% of Bulgaria’s GDP which are equal to a rating of VH+ (cf. ECB 2019a.).

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Table 11- Bulgaria's Debt Affordability.

[...]

• Université: International School of Management Dortmund
• Cours: Financial Planning and Rating
• Note: 2,0
• Auteur: Alexander Kahlert (Auteur)
• Année de publication: 2019
• Pages: 32
• N° de catalogue: V504103
• ISBN (ebook): 9783346054142
• Langue: anglais
• mots-clé: financial, planning, rating, case, study, bulgaria