30.10.2023

Fitch Ratings has affirmed Bulgaria’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘BBB’ with a Positive Outlook.

Bulgaria’s ratings are supported by its strong external and public balance sheets versus ‘BBB’ peers and credible policy framework, underpinned by EU membership and a long-standing currency board. On the other hand, the low level of investments/GDP and unfavourable demographics weigh on potential growth and government finances over the long term.

The Positive Outlook reflects the prospects for Bulgaria’s euro adoption, which would lead to further improvement in external metrics. Despite a delay in the euro area accession process, there is broad political commitment to euro adoption in 2025. Since the formation of the new government, parliament has passed all remaining post-ERM II commitments, while the amendment of the Central Bank Law should be approved by end-2023.

Euro adoption: Bulgaria’s HICP inflation is easing but remains significantly above that of the three best performing EU member states, and does not currently comply with the price stability criterion. Given the considerable uncertainty about the inflation trajectory, it remains questionable whether Bulgaria will meet the price stability criterion in mid-2024 (the key date for 2025 euro adoption). Bulgaria is on course to meet all other nominal euro-adoption criteria (public finances, interest rate and exchange rate). Fitch analysts consider euro adoption as supportive to the rating, as all else equal, the output of Fitch’s proprietary Sovereign Rating Model (SRM) would improve by around two notches.

Growth acceleration: Following the economic expansion in the first half of 2023, despite slowing external demand, high inflation and elevated uncertainty, Fitch has raised its GDP growth forecast for this year to 1.9% (from 1.3% expected in May). Household consumption will likely be supported by higher fiscal spending, the strong labour market, reduction in the saving rate and strong credit growth. Investment growth should gradually improve in the second half of 2023 as EU transfers increase. The GDP growth will speed up to 2.8% in 2024 and 3% in 2025, as easing of private consumption will be balanced by stronger investment supported by EU transfers. Fitch analysts take account of the fact that the government is committed to implementation of Recovery and Resilience Facility reforms and recently submitted the second payment request for EUR 724 million (0.8% of 2023 GDP).

Gradual easing of inflation: Fitch projects headline HICP inflation will continue to gradually decelerate, while core pressures will decline slower due to strong private consumption, a tight labour market and second-round effects. Fitch sees inflation on average at 9.1% in 2023, 4.6% in 2024 and 2.9% in 2025. The inflation outlook remains subject to considerable uncertainty stemming mainly from development of commodity prices and persistency of second-round effects.

Wider medium-term fiscal deficits and low public debt: We forecast the budget deficit at 2.6% of GDP in 2023, affected by the lower-than-planned cost of energy support measures, higher social and capital spending, and public sector wage increases. While Bulgaria has a good record of fiscal prudence, it is expected that the current government might favour slightly wider deficits in the medium term to boost public sector investment and increase social transfers to reduce inequalities. The Agency expects budget deficits of 2.8% of GDP in 2024 and 3.5% of GDP in 2025.

Despite wider fiscal deficits, Bulgaria’s public debt ratio will remain very low compared with EU countries and ‘BBB’ peers. Fitch analysts project general government debt/GDP ratio to remain below 30% until 2027.

Factors that could lead to positive rating action: progress toward euro area accession, including greater confidence in Bulgaria meeting membership criteria and the likely timing of euro adoption; an improvement in the economic growth potential, for example, via the implementation of structural and governance reforms to improve the business environment and/or effective use of EU funds.

Factors that could lead to negative rating action: lack of progress in euro area accession due to persistent political instability or a failure in meeting convergence criteria; lower medium-term growth prospects driven, for example, by a large adverse macroeconomic shock or inflation entrenched at high levels.

You can read the full press release here.