International credit rating agency Fitch Ratings has improved its outlook on Bulgaria's currency ratings to positive from negative.

This has made it less likely that they will fall into junk territory, reflecting the Bulgaria's declining debt levels and recovering economy, reported Tuesday Dow Jones Newswires as cited by The Wall Street Journal.

Fitch has Bulgaria's foreign and local currency ratings at BBB- and BBB, or one notch and two notches above junk grade, respectively.

The credit ratings company said an upgrade is possible if Bulgaria's banking sector shows clearer evidence of stabilization, and the budget deficit and external debt are reduced further.

Negative action could be taken for reasons including weak domestic demand or impacts from problems at Greek banks.

The WSJ points out that Bulgaria's GDP was up 2.5% in the first quarter of 2011 from a year earlier, driven by exports, according to Fitch, though well below the 4.9% before its pre-crisis peak.

Fitch expects GDP growth of 3% this year and 3.8% next year, compared with 0.2% in 2010; the official estimate of the Bulgarian government for 2011 is a GDP growth of 3.6%, and for 2012 – 4.1%.

The strong trade performance has helped Bulgaria cut its current-account deficit to 1% of GDP last year, from 8.9% in 2009 and 23% in 2008.

The general government budget deficit was down at 3.2% of GDP last year from 4.7% in 2009, and Fitch says a target of 2.5% this year, which is government's project, is realistic. Bulgaria's external debt declined by 8 percentage points to 41% at year's end from the end of 2009.

While bad loans are still increasing as weak domestic demand pressures bank-asset quality, lenders are well capitalized with a substantial buffer against shocks, Fitch said.

Moody's Investors Service last month placed the government's ratings on review for a possible upgrade citing factors including its strong balance sheet and expectations the nation's deficit would fall below the European Union's ceiling of 3% of gross domestic product this year.