site.btaFitch Ratings Affirms Bulgaria's Long-Term Foreign-Currency Issuer Default Rating at 'BBB' with Positive Outlook

July 24 (BTA) - US credit rating agency Fitch Ratings
has affirmed Bulgaria's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BBB' with a Positive Outlook, the
Finance Ministry reported on Saturday.
The Positive Outlook reflects the dissipation of macroeconomic risks stemming from the COVID-19 pandemic, underpinned by a more resilient economy, as well as continued gradual progress towards euro adoption. In Fitch's view, short-term downside risks tied to the coronavirus pandemic and prolonged electoral uncertainty are more than offset by prospects of substantial funding for investment from the EU and a broad commitment to macro and fiscal stability.

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 weak potential growth, partly due to unfavourable demographics, which could weigh on government finances over the long term. Governance indicators and income levels are slightly above peers.

Fitch now expects the country's economy to expand by 4.7 per cent in 2021, compared with 3 per cent previously and in line with the 'BBB' median. The upward revision reflects better-than-expected 1Q21 GDP, largely due to resilient private consumption, despite a more challenging health situation - Bulgaria recorded one of the highest COVID-19-related death rates in Europe in winter. Recent indicators point to further strengthening of domestic demand, while exports (which have struggled in recent quarters) are likely to pick up thanks to cyclical factors. Bulgaria's very low vaccination rate compared to EU (12.6 per cent fully vaccinated as of July 20, versus an EU average of 43 per cent) raises some downside pandemic-related risks, although the authorities are unlikely to put in place severe containment measures that would significantly affect economic activity.

Investment will be a key driver of growth over the medium term, as Bulgaria will be one of the main beneficiaries of EU transfers in the coming years. Given the sheer size of funds, Fitch expects the EU Recovery and Resilience Facility to play a key role in supporting GDP growth of 3.9 per cent in 2022-2023.

The credit rating agency projects a modest widening of Bulgaria's fiscal deficit in 2021, to 5.0 per cent of GDP versus 5.5 per cent for the 'BBB' median, reflecting an increase in pandemic-related expenditure. Fitch expects the fiscal deficit to narrow gradually to 2 per cent of GDP in 2023 thanks to the unwinding of support measures. This will keep public debt/GDP at below 30 per cent over the forecast horizon, broadly in line with the authorities' convergence programme and well below the 'BBB' median of 57 per cent. There is some uncertainty about the fiscal path beyond 2021 given the electoral situation. However, Fitch maintains its view that risks are contained by a long record of fiscal prudence that is well entrenched across the political spectrum.

At present Fitch does not see major risks to economic policy or to Bulgaria's commitment to the EU/euro area accession, with these issues playing an insignificant role during the campaigns.

The authorities have stated their commitment to adopting the euro by 2024, a timeline that Fitch considers realistic. Bulgaria's banking sector remains liquid and well capitalized.

The main factors that could lead to positive rating action are the progress toward eurozone accession, including greater confidence in Bulgaria meeting membership criteria and the likely timing of euro adoption. The factors that could lead to negative rating action are adverse policy developments, for example following a period of political paralysis, which reduce confidence in economic growth prospects and the policy framework. Also a prolonged rise in public debt driven for example by persistent fiscal easing, the materialization of contingent liabilities on the sovereign's balance sheet or weaker growth prospects. RI/VE
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