22.01.2022

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 balance its strong external and public balance sheets and credible policy framework, underpinned by EU membership and a long-standing currency-board arrangement, against a weaker potential growth compared to peers, partly due to unfavourable demographics, which could weigh on government finances over the long term. The Agency also reports that governance indicators have fallen below peers, reflecting a deterioration in government effectiveness and control of corruption prior to 2021.

The Positive Outlook reflects the prospect of the country’s joining the euro area. In Fitch’s view, short-term downside risks tied to the coronavirus pandemic have eased and are more than offset by prospects of substantial EU funding for investment and a broad commitment to macro and fiscal stability (anchored by the inclusion of the Bulgarian lev into Exchange Rate Mechanism II).

According to Fitch Ratings, the formation of a coalition government in December 2021 has significantly reduced political uncertainty following a succession of inconclusive elections last year. In the Agency’s view, the coalition parties have pledged a comprehensive anti-corruption agenda to improve rule of law, while promising increased investment and more effective public spending. The Government has reinstated the goal of joining the euro by 2024 while safeguarding a long policy record of fiscal prudence and sound macroeconomic management.

Fitch maintains its view that economic prospects will be favourable over the next years, supported by substantial EU funding (for a total of around 36% of GDP in 2022-2027). The Agency forecasts a real GDP growth of 3.7% in 2022, accelerating to 4.5% in 2023.

Bulgaria’s National Recovery and Resilience Plan (NRRP) is expected to be approved over the next couple of months, with a first transfer of funds likely by mid-2022. Fitch Ratings points out the challenge the country faces with implementing the Plan and whether it will be an effective policy anchor, but assesses that combined with other investment programmes, this could help lift longer-term economic prospects and potentially slow the rate of decline in the population.

Fitch forecasts that average inflation will rise to 5.2% in 2022, the highest rate since 2008, driven by higher commodity prices (and subsequent pass through effects), and to a lesser extent, domestic demand side pressures.

Following the authorities’ expressed commitment to eurozone accession, the focus will now turn to meeting structural criteria under ERMII and convergence criteria. Overall, Fitch considers euro adoption as supportive of Bulgaria’s long-term rating and assesses that it could even be raised by two notches between admission to the ERM II to joining the euro.

The Agency expects a government deficit of 3.8% in 2021, which is better than expected, due to strong revenue growth. Fitch expects the general government deficit to fall to 3% in 2023 from 4.6% in 2022. This would be consistent with the public debt/GDP ratio increasing to 30% but still well below the current 'BBB' median of 60.3%. Bulgaria’s banking sector maintained adequate liquidity and capitalisation remained solid.

The key factors that could lead to a positive rating action are the progress toward eurozone accession and an improvement in growth potential. The factors that could lead to downgrade are a significant delay in the timeline of eurozone accession, a prolonged rise in public debt, materialisation of contingent liabilities on the sovereign’s balance sheet or weaker growth prospects.

You can read the full text of the press release here.