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LONDON/SOFIA, Oct 30 (Reuters) - Ratings agency Standard & Poor's cut Bulgaria's credit rating to BBB from BBB+ with a negative outlook on Thursday, citing worries about external imbalances and economic cooling.
"The downgrade reflects our concerns over the sovereign's heightened external vulnerabilities," S&P credit analyst Marko Mrsnik said in a statement.
Analysts say Bulgaria, along with Romania and the Baltic states, is among the most vulnerable emerging economies due to its heavy dependence on foreign cash and a current account deficit of over 20 percent of GDP.
On Monday, S&P downgraded Romania's sovereign rating to "BB+", citing inadequate policy reaction to economic risks, and saying it was the only EU member with "junk" status.
Tighter global credit conditions and liquidity are likely to hit Bulgaria's economic growth, which some analysts say would fall below 3 percent next year, while others say a recession, already seen in the Baltics, is not ruled out.
The economy grew 7.1 percent in the first half of 2008.
"Bulgaria has entered the global credit crisis with all the symptoms of an overheating economy, raising the risk of a sharp slowdown in external financing flows," Mrsnik said.
"Foreign direct investment, which in 2007 fully covered the current account deficit, is declining as the property and construction sectors decelerate," he said.
Much of the over 6 billion euro in FDI annually attracted by Bulgaria in recent years went into real estate and related financial services, at the expense of manufacturing. This would contribute to the expected slowdown, S&P said.
Another risk facing Bulgaria is a possible reduction in western European parent banks' exposure to the their daughters in the country, which could lead to a rapid slowdown in credit and economic growth, the agency added.
Over 80 percent of Bulgaria's 24 banks are owned by western European lenders mainly from Italy, Austria and Greece.
"If we believe the economic and fiscal situation is significantly worsening, the ratings on Bulgaria could be lowered again, but we would expect the ratings to remain in the BBB category," S&P said. (Reporting by Carolyn Cohn and Anna Mudeva, editing by Mike Peacock)