One of the major global credit rating agencies, Moody's, has confirmed Bulgaria's government bond rating and stable outlook in its annual credit report on the country, issued Tuesday.

Moody's Investors Service says that Bulgaria's Baa2 government bond rating and stable outlook reflect its moderate levels of economic and institutional strength as well as high government financial strength, which contribute to the country's moderate susceptibility to event risk.

Bulgaria’s sovereign debt is rated BBB by Standard & Poor's, and BBB- by Fitch.

The agency points out that Moody's report is an annual update to the markets and does not constitute a rating action, and that it determines a country's sovereign rating by assessing it on the basis of four key factors - economic strength, institutional strength, government financial strength and susceptibility to event risk - as well as the interplay between them.

According to Moody's, the moderate assessment of Bulgaria's economic strength reflects a mid-sized economy of approximately USD 54 B and average incomes that are in the very middle of incomes globally, plus an increasing diversification of economic activity.

As a consequence, Bulgaria's concentration in natural resource-based exports is declining, which should improve the economy's stability and reduce its cyclicality, the credit rating agency says.

"Although structural reforms undertaken to gain EU membership plus strong foreign direct investment (FDI) and other capital inflows drove rapid income growth in the years leading up to the 2008-09 global financial crisis, average wealth is less that 50% of the euro area average. The government's National Reform Programme sets an ambitious goal of raising Bulgaria's standard of living to 60% of the euro area average by 2020," Moody's annual report on Bulgaria states.

Moody's assesses Bulgaria's institutional strength as moderate, "as its capacity was strengthened in the process of EU accession and as the macroeconomic policy framework has been fairly predictable for some time."

Nonetheless, Bulgaria's government effectiveness and particularly the rule of law score rather low on international surveys conducted by the World Bank, due to the need to further tackle corruption, the agency stresses.

"Moody's considers the [Bulgarian] government's financial strength to be high based on its healthy finances, with low debt compared with its peers in the euro area. The general government deficit shrank to 2.1% of GDP in 2011 (compared with the Maastricht limit of 3% of GDP) from 3.1% in 2010, a trend that has strengthened market confidence despite the intensification of the euro area debt crisis late last year and the integration of the Bulgarian and Greek economies and banking systems," Moody's says, while noting that the [Bulgarian] government expects the deficit to fall to 1.6% of GDP in 2012, compared with Moody's forecast of around 2%.

However, Moody's "is not as optimistic as the government given still-high unemployment, anaemic expansion in industrial output (which will contain the rise in income from spending-related taxes, household incomes and company profits), and as import demand is likely to remain subdued (limiting the growth in import-related revenues)."

Bulgaria's susceptibility to event risk is "judged as moderate, which mainly reflects the economy's extensive euroization, the significant presence of Greek-owned financial institutions in the local banking system, high external debt and weak external liquidity, which pose risks in the highly unlikely event of a change in the monetary policy regime (the currency board arrangement - CBA - in which the lev has been pegged to the euro at roughly 2 per euro since 1997)."