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

The international rating agency Fitch Ratings has affirmed Bulgaria's Long-Term Foreign-Currency Issuer Default Rating at 'BBB' with a positive outlook, the Finance Ministry press office said on Saturday.

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. This is balanced by low level of investments/GDP and unfavourable demographics, which weigh on potential growth and government finances over the long term. In early August, the international rating agency affirmed the long-term rating of the Bulgarian Development Bank (BDB).

The Positive Outlook reflects the prospects for euro adoption, which would lead to further improvement in external metrics. Despite a delay in the eurozone 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-ERMII 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 it does not currently comply with the price stability criterion. Given 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).

The criterion allows a degree of flexibility as price developments in a country can be judged an outlier if its inflation rate is significantly lower than that of the other member states owing to country-specific factors. Exclusion of two outliers from the calculation allowed Croatia to meet this criterion in 2022. However, it remains unclear how flexibility could be applied in Bulgaria's case. Bulgaria is on course to meet all other euro-adoption nominal criteria (public finances, interest rate and exchange rate). Overall, we 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.

Resilient Growth to Accelerate

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) as household consumption will likely be supported by higher fiscal spending, the strong labour market, reduction in the saving rate and strong credit growth.

Fitch forecasts GDP growth at 2.8% in 2024 and 3% in 2025, as easing of private consumption will be balanced by stronger investment supported by EU transfers. The government is committed to implementation of Recovery and Resilience Facility reforms and recently submitted the second payment request for EUR724 million (0.8% of 2023 GDP). The total grant allocation stands at EUR5.7 billion (6% of GDP).

Inflation to Gradually Ease

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, above the current 'BBB' median of 5.9%, 3.9% and 3%, respectively.

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

Fitch forecasts 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, Fitch expressed belief 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. Fitch expects budget deficits of 2.8% of GDP in 2024 and 3.5% of GDP in 2025.

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

Among the factors that could, individually or collectively, lead to negative rating action/downgrade are an eventual lack of progress in eurozone accession due to persistent political instability or a failure in meeting convergence criteria, and lower medium-term growth prospects driven, for example, by a large adverse macroeconomic shock or inflation entrenched at high levels.